UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                    FORM 10-Q


              [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                For the quarterly period ended March 31, 1999

                                       OR

              [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                        For the transition period from to

                           Commission File No.: 1-5270

                              SOFTNET SYSTEMS, INC.
             (Exact name of registrant as specified in its charter)

              Delaware                                  11-1817252
   --------------------------------        ---------------------------------
   (State or other jurisdiction of        (I.R.S. Employer Identification No.)
     incorporation or organization)

650 Townsend Street, Suite 225, San Francisco, CA          94043
-------------------------------------------------      --------------
   (Address of principal executive offices)              (Zip Code)

Registrant's telephone number, including area code:  (415) 365-2500

                   

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days.

                            (1)     Yes X    No
                                       ---     ---
                            (2)     Yes X    No
                                       ---     ---

As of April 30, 1999, there were 15,880,098  shares of the  Registrant's  common
stock, par value $0.01 per share outstanding. 

                       This document (excluding Exhibits)
                               contains 50 pages.
<PAGE> 
                              SOFTNET SYSTEMS, INC.

                                    FORM 10-Q

                                      INDEX


                                                                            PAGE
                                                                            ----
PART I.   FINANCIAL INFORMATION

Item 1.  Financial Statements

         Consolidated Condensed Balance Sheets as of March 31, 1999
            (unaudited) and September 30, 1998 (audited)...................   3

         Consolidated Condensed Statements of Operations for the 
            three months and six months ended
            March 31, 1999 and 1998 (unaudited)............................   4

         Consolidated Condensed Statements of Cash Flows for the
            six months ended March 31, 1999 and 1998 (unaudited)...........   5

         Notes to Consolidated Condensed Financial Statements..............   6

Item 2.  Management's Discussion and Analysis of Financial
         Condition and Results of Operations................................ 15
                                                                               

Item 3.  Quantitative and Qualitative Disclosures about Market Risk......... 26

PART II.   OTHER INFORMATION

     Item 1.  Legal Proceedings - Not applicable

     Item 2.  Changes in Securities......................................... 27

     Item 3.  Defaults upon Senior Securities - Not applicable

     Item 4.  Submission of Matters to a Vote of Security Holders........... 28

     Item 5.  Other Information............................................. 29

     Item 6.  Exhibits and Reports on Form 8-K.............................. 49



<PAGE>



                                                    
Part I.  Financial Information
Item 1.  Financial Statements

                     SOFTNET SYSTEMS, INC. AND SUBSIDIARIES
                      Consolidated Condensed Balance Sheets
                   As of March 31, 1999 and September 30, 1998
                        (In thousands, except share data)
<TABLE>
<CAPTION>


                                                                                        March 31,         September 30,
                                                                                           1999               1998
                                                                                      ---------------   ------------------
                                                                                       (Unaudited)
<S>                                                                                        <C>                 <C>       
                                     ASSETS

Current assets:
   Cash and cash equivalents.....................................................          $   6,554           $   12,504
   Accounts receivable, net......................................................                475                  110
   Notes receivable..............................................................              4,500                   --
   Inventories...................................................................                542                  268
   Other current assets..........................................................              2,305                  571
                                                                                      ---------------   ------------------
      Total current assets.......................................................             14,376               13,453
Restricted cash..................................................................                800                  800
Property and equipment, net......................................................             12,750                5,981
Acquired technology and other intangibles, net...................................             17,707                  311
Net assets associated with discontinued operations...............................              4,642                8,930
Other assets.....................................................................              5,090                  150
                                                                                      ===============   ==================
    Total assets.................................................................          $  55,365           $   29,625
                                                                                      ===============   ==================

  LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
                                    (DEFICIT)

Current liabilities:
   Accounts payable and accrued expenses.........................................          $   9,806           $    6,938
   Deferred gain.................................................................              2,274                   --
   Short-term debt...............................................................              1,000                   --
   Current portion of capital leases.............................................              1,404                  613
   Current portion of long-term debt.............................................                933                  541
                                                                                      ---------------   ------------------
      Total current liabilities..................................................             15,417                8,092
Capital lease obligations, net of current portion................................              1,611                  297
Long-term debt, net of current portion...........................................             20,548                9,220
                                                                                      ---------------   ------------------
    Total liabilities............................................................             37,576               17,609
                                                                                      ---------------   ------------------
Redeemable convertible preferred stock; $0.10 par value; 37,610 shares
   designated; 7,625 and 20,757 shares issued and outstanding, respectively......              6,883               18,187
                                                                                      ---------------   ------------------
Stockholders' equity (deficit):
   Preferred stock; $0.10 par value; 3,962,390 shares designated; no shares
      issued and outstanding.....................................................                 --                   --
   Common stock; $0.01 par value; 25,000,000 shares authorized; 10,417,866 and
      8,191,550 shares issued and outstanding, respectively......................                104                   82
   Additional paid-in capital....................................................             76,571               43,700
   Deferred stock compensation...................................................             (1,476)                (188)
   Accumulated deficit...........................................................            (64,293)             (49,765)
                                                                                      ---------------   ------------------
      Total stockholders' equity (deficit).......................................             10,906               (6,171)
                                                                                      ===============   ==================
      Total liabilities, redeemable convertible preferred stock and
          stockholders' equity (deficit).........................................          $  55,365           $   29,625
                                                                                      ===============   ==================
<FN>

                   The  accompanying   notes  are  an  integral  part  of  these
consolidated condensed financial statements.
</FN>
</TABLE>


                     SOFTNET SYSTEMS, INC. AND SUBSIDIARIES
                 Consolidated Condensed Statements of Operations
        For the Three Months and Six Months Ended March 31, 1999 and 1998
                      (In thousands, except per share data)
                                   (Unaudited)

<TABLE>
<CAPTION>

                                                           Three Months Ended                  Six Months Ended
                                                               March 31,                          March 31,
                                                     -------------------------------    -------------------------------
                                                         1999              1998             1999              1998
                                                     --------------    -------------    --------------    -------------
<S>                                                      <C>               <C>              <C>               <C>    
Net sales.......................................         $  1,027          $   251          $  1,471          $   466
Cost of sales...................................              891              134             1,298              250
                                                     --------------    -------------    --------------    -------------
    Gross profit................................              136              117               173              216
                                                     --------------    -------------    --------------    -------------

Operating expenses:
    Selling and marketing.......................            2,362              218             4,370              387
    Engineering.................................              730               115            1,469               215
    General and administrative..................            2,313              661             4,177            1,326
    Depreciation................................              803               72             1,202              139
    Amortization................................               14              104               725              207
    Compensation expense related to stock
        options and warrants....................            1,009                --            1,041                --
                                                     --------------    -------------    --------------    -------------
        Total operating expenses................            7,231            1,170            12,984            2,274
                                                     --------------    -------------    --------------    -------------

Loss from continuing operations.................            (7,095)          (1,053)          (12,811)          (2,058)

Other income (expense):
    Interest expense............................              (608)            (186)           (1,127)            (432)
    Other income................................               58                7               208                9
                                                     --------------    -------------    --------------    -------------

Loss from continuing operations before income
    taxes                                                   (7,645)          (1,232)          (13,730)          (2,481)

Income taxes....................................               --               --                --               --
                                                     --------------    -------------    --------------    -------------

Loss from continuing operations before
    discontinued operations.....................            (7,645)          (1,232)          (13,730)          (2,481)

Income (loss) from discontinued operations......              (246)             19               (384)          (1,110)
                                                     --------------    -------------    --------------    -------------

Net loss........................................            (7,891)          (1,213)          (14,114)          (3,591)

Preferred dividends.............................              (171)             (63)             (414)             (63)
                                                     --------------    -------------    --------------    -------------

Net loss applicable to common shares............         $  (8,062)       $  (1,276)        $ (14,528)       $  (3,654)
                                                     ==============    =============    ==============    =============

Basic and diluted loss per share:
    Continuing operations.......................         $   (0.82)       $   (0.17)        $   (1.55)       $   (0.35)
    Discontinued operations.....................             (0.03)           0.00              (0.04)           (0.16)
    Preferred dividends.........................             (0.02)           (0.01)            (0.05)           (0.01)
                                                     ==============    =============    ==============    =============
    Net loss applicable to common shares........         $   (0.87)       $   (0.18)        $   (1.64)       $   (0.52)
                                                     ==============    =============    ==============    =============

Shares used to compute basic and diluted loss
    per share...................................             9,316            6,992             8,839            6,966
                                                     ==============    =============    ==============    =============

<FN>

                   The  accompanying   notes  are  an  integral  part  of  these
consolidated condensed financial statements.
</FN>
</TABLE>
<PAGE>


                     SOFTNET SYSTEMS, INC. AND SUBSIDIARIES
                 Consolidated Condensed Statements of Cash Flows
                For the Six Months Ended March 31, 1999 and 1998
                                 (In thousands)
                                   (Unaudited)
<TABLE>
<CAPTION>

                                                                                              For the Six Months Ended
                                                                                                      March 31,
                                                                                         ------------------------------------
                                                                                               1999                1998
                                                                                         -----------------     --------------
<S>                                                                                           <C>                 <C>      
Cash flows from operating activities:
     Net loss.......................................................................          $  (14,114)         $  (3,591)
                                                                                                                    
        Adjustments  to  reconcile  net  loss  to net  cash  used  in  operating
activities:
            Loss from discontinued operations.......................................                 384              1,110
            Depreciation and amortization...........................................               1,927                346
            Amortization of deferred stock compensation.............................               1,041                 --
            Amortization of deferred debt issuance costs............................                 398                 --
            Provision for bad debts.................................................                 101                 15
            Changes in operating assets and liabilities:
                Accounts receivable.................................................                (280)               (60)
                Inventories.........................................................                (274)              (575)
                Other current assets................................................                (477)               (27)
                Accounts payable and accrued expenses...............................               1,047                379
                Deferred revenue....................................................                  22                 --
                                                                                         -----------------     --------------
Net cash used in operating activities of continuing operations......................             (10,225)            (2,403)
                                                                                         -----------------     --------------
Net cash provided by (used in) operating activities of discontinued operations......                 573               (474)
                                                                                         -----------------     --------------

Cash flows from investing activities:
     Purchase of property and equipment.............................................              (4,659)              (232)
     Purchase of Intellicom including acquisition costs, net of cash acquired.......                (803)                --
     Sale of net assets of telecommunications operations, net of selling costs......               1,195                 --
     Acquired technology and other intangibles......................................              (2,046)                --
     Other assets...................................................................                (313)                --
                                                                                         -----------------     --------------
Net cash used in investing activities of continuing operations......................              (6,626)              (232)
                                                                                         -----------------     --------------
Net cash provided by (used in) investing activities of discontinued operations......                  34                (82)
                                                                                         -----------------     --------------

Cash flows from financing activities:
     Proceeds from issuance of long-term debt, net of cash issuance costs...........              13,088                 --
     Repayment of long-term debt....................................................                (753)              (184)
     Borrowings under revolving credit note.........................................              18,285              4,953
     Payments under revolving credit note...........................................             (21,215)            (5,434)
     Additional costs of issuance of redeemable convertible preferred stock.........                (144)                --
     Net proceeds from issuance of redeemable convertible preferred stock...........                  --              4,600
     Proceeds from exercise of options..............................................               1,347                 46
     Proceeds from exercise of warrants.............................................               1,038                 95
     Preferred dividends paid in cash...............................................                 (95)                --
     Capitalized lease obligations paid.............................................                (524)               (11)
                                                                                         -----------------     --------------
Net cash provided by financing activities of continuing operations..................              11,027              4,065
                                                                                         -----------------     --------------
Net cash used in financing activities of discontinued operations....................                 (733)              (894)
                                                                                         -----------------     --------------

Decrease in cash and cash equivalents...............................................               (5,950)               (20)
Cash and cash equivalents, beginning of period......................................              12,504                 37
                                                                                                               --------------
                                                                                         =================
Cash and cash equivalents, end of period............................................          $    6,554            $    17
                                                                                         =================     ==============
<FN>

                   The  accompanying   notes  are  an  integral  part  of  these
consolidated condensed financial statements.
</FN>
</TABLE>
<PAGE>


                     SOFTNET SYSTEMS, INC. AND SUBSIDIARIES
              Notes to Consolidated Condensed Financial Statements

1.   Basis of Presentation

The  financial  information,  except for the balance  sheet as of September  30,
1998,  included  herein is unaudited;  however,  such  information  reflects all
adjustments  (consisting  solely of normal recurring  adjustments) which are, in
the opinion of management,  necessary for a fair  presentation  of the condensed
consolidated  statements of financial  position,  results of operations and cash
flows as of and for the interim periods ended March 31, 1999 and 1998.

The Company's  annual report on Form 10-K/A for the fiscal year ended  September
30, 1998, as filed with the Securities and Exchange  Commission,  should be read
in  conjunction  with  the   accompanying   Consolidated   Condensed   Financial
Statements.  The Consolidated  Condensed  Balance Sheet as of September 30, 1998
was derived from the Company's audited Consolidated Financial Statements.

The results of operations  for the three and six months ended March 31, 1999 are
based in part on estimates that may be subject to year-end  adjustments  and are
not necessarily indicative of the results to be expected for the full year.

The balance sheet as of September 30, 1998 and the  statements of operations and
cash flow for the three and six months  ended March 31, 1998 have been  restated
for  the   effects   of   discontinued   operations   (see   Note  2).   Certain
reclassifications have been made to conform with the current presentation.

2.    Discontinued Operations

Document Management Segment

In  April  1999,  the  Company's  stockholders  adopted  a plan  to  discontinue
operations  of its document  management  segment.  This segment  consists of the
Company's wholly-owned subsidiary,  Micrographic Technology Corporation ("MTC").
Accordingly,  the operating results of the document management segment have been
segregated  from  continuing  operations and reported as a separate line item on
the statement of operations.  The assets and liabilities of such operations have
been reflected as a net asset.

Operating results of the discontinued document management segment are as follows
(in thousands):

                              Three Months Ended           Six Months Ended    
                                  March 31,                   March 31,
                            -------------------------  ------------------------
                              1999           1998       1999            1998
                            ----------    -----------  ----------    ----------

Net sales................... $ 3,768         $ 3,985    $ 7,620        $ 6,647
Loss before income taxes....    (251)           (204)      (527)        (1,225)
Income taxes................      --              --         --             --
Net loss....................    (251)           (204)      (527)        (1,225)



<PAGE>



Assets and liabilities of the discontinued  document  management  segment are as
follows (in thousands):

                                                      March 31,   September 30,
                                                        1999         1998
                                                    ------------  -------------

Current assets:
    Cash and cash equivalents......................    $    --        $     --
    Accounts receivable, net.......................      3,964           2,995
    Current portion of gross investment in leases..      1,169           1,579
    Inventories....................................        581           1,078
    Other current assets...........................        289             310
                                                    ------------  -------------
                                                         6,003           5,962
Gross investment in leases, net of current portion.      1,644           1,863
Property and equipment, net........................        415             541
Goodwill, net......................................        308             644
Other assets.......................................        693             974
                                                    ------------  -------------
                                                         9,063           9,984
                                                    ------------  -------------
Current liabilities:
    Accounts payable and accrued expenses..........      2,523           2,485
    Deferred revenue...............................        275             100
    Current portion of capital leases..............         20              19
    Current portion of long-term debt..............      1,280           1,280
                                                    ------------  -------------
                                                         4,098           3,884
Capital lease obligation, net of current portion...         20              30
Long-term debt, net of current portion.............        303           1,015
                                                    ------------  -------------
                                                         4,421           4,929
                                                    ============  =============
Net assets associated with discontinued operations.  $   4,642       $   5,055
                                                    ============  =============

Telecommunications Segment

In July 1998,  the Company's  Board of Directors  adopted a plan to  discontinue
operations  of its  telecommunications  segment.  This  segment  consists of the
Company's wholly owned subsidiary Kansas  Communications,  Inc.  ("KCI"),  along
with KCI's Milwaukee  operations  purchased from Executone  Management  Systems,
Inc. Accordingly,  the operating results of the telecommunications  segment have
been segregated from continuing  operations and reported as a separate line item
on the statement of operations.  The assets and  liabilities of such  operations
have been reflected as a net asset.

On  February  12,  1999,  substantially  all of the  assets  of KCI were sold to
Convergent  Communications  Services, Inc. ("Convergent  Communications") for an
aggregate  purchase price of approximately $6.3 million subject to adjustment in
certain events. Convergent Communications paid $100,000 in cash in November 1998
upon execution of the letter of intent to purchase and paid the remainder of the
purchase  price on the closing date as follows:  (i) $1.4 million in cash;  (ii)
approximately 30,000 shares of Convergent  Communications' parent company common
stock with an agreed  value of  approximately  $300,000  ($10.00 per share) (the
"Convergent  Shares");  (iii) a  promissory  note in the amount of $2.0  million
which is payable on July 1, 1999 and bears  simple  interest  at the rate of 11%
per annum; (iv) a promissory note in the amount of $1.0 million which is payable
on the date that is 12  months  following  the  closing  date and  bears  simple
interest at the rate of 8% per annum;  and (v) a promissory note in an amount of
$1.5  million  which is  payable on the date  which is 12 months  following  the
closing  date and  bears  simple  interest  at the rate of 8% per  annum  and is
subject to mandatory prepayment in certain events. Furthermore, a purchase price
adjustment subsequent to closing provided the Company with additional Convergent
Shares with an agreed value of $198,000  for a total  investment  in  Convergent
Shares of $498,000,  which is  classified  as other  assets on the  accompanying
consolidated  condensed  balance sheet.  The sale of KCI's assets  resulted in a
gain of $2.3 million,  which is being  deferred  until the Company has collected
the $4.5 million of notes receivable issued in connection with this sale.


<PAGE>


Operating results of the discontinued  telecommunications segment are as follows
(in thousands):

                                  Three Months Ended          Six Months Ended  
                                    March 31, (1)              March 31, (1)
                                -----------------------  -----------------------
                                  1999          1998      1999           1998
                                ----------   ----------  ----------   ----------

Net sales......................  $ 1,098        $ 4,443   $ 4,730        $ 8,392
Income before income taxes.....       23            223       216            115
Income taxes...................      (18)            --       (73)            --
Net income.....................        5            223       143            115
------------------------

     (1) Operating results for KCI are only through the date of disposition.

Assets and  liabilities of the  discontinued  telecommunications  segment are as
follows (in thousands):

                                                             September 30,
                                                                  1998
                                                            ------------------

Current assets:
    Cash and cash equivalents...........................           $     --
    Accounts receivable, net............................              1,734
    Inventories.........................................              2,248
    Other current assets................................                 36
                                                            ------------------
                                                                      4,018
Property and equipment, net.............................                427
Goodwill, net...........................................              1,663
Other assets............................................                 21
                                                            ------------------
                                                                      6,129
                                                            ------------------
Current liabilities:
    Accounts payable and accrued expenses...............              1,582
    Current portion of capital leases...................                 32
    Deferred revenue....................................                593
                                                            ------------------
                                                                      2,207
Capital lease obligation, net of current portion........                 47
                                                            ------------------
                                                                      2,254
                                                            ------------------
Net assets associated with discontinued operations......          $   3,875
                                                            ==================

3.    Acquisition of Intellicom

On February 9, 1999, a  wholly-owned  subsidiary of the Company  merged with and
into   Intelligent   Communications,   Inc.   ("Intellicom",   the   "Intellicom
Acquisition").  Intellicom is a provider of two-way  satellite  Internet  access
options using very small aperture  terminal  technology  ("VSAT").  The purchase
price of $14.5 million was  comprised of: (i) a cash  component of $500,000 (the
"Cash  Consideration");  (ii) a  promissory  note in the amount of $1.0  million
bearing  interest at 7.5% per annum and due one year after  closing  (the "First
Promissory Note"); (iii) a promissory note in the amount of $2.0 million bearing
interest  at 8.5%  per  annum  and due two  years  after  closing  (the  "Second
Promissory   Note",   together  with  the  First   Promissory  Note,  the  "Debt
Consideration");  (iv) the issuance of 500,000  shares of the  Company's  common
stock (adjustable  upwards after one year in certain  circumstances),  valued at
$14.938 per share, for a total value of $7.5 million (the "Closing Shares"); and
(v)  additional  shares of the Company's  common stock  issuable upon the first,
second and third anniversaries of the closing, valued at a total of $3.5 million
(the  "Anniversary  Shares",  together  with the  Closing  Shares,  the  "Equity
Consideration").  In addition,  a demonstration bonus of $1.0 million payable in
cash or shares of the Company's  common stock at the Company's option within one
year after closing if certain  conditions are met is also a part of the purchase
price;  however,  due to the  uncertainty as to whether or not such  performance
criteria  will  be  met,  the  Company  has  not  accrued  for  such  contingent
consideration.

The purchase price,  including direct merger costs, has been allocated to assets
acquired  and  liabilities  assumed  based on fair  market  value at the date of
acquisition.  The fair value of assets and liabilities  assumed is summarized as
follows (in thousands):

Current assets..........................................    $     503
Property and equipment..................................          684
Acquired technology.....................................       16,075
Other assets............................................           77
Current liabilities.....................................        2,470

The Company  accounted for the Intellicom  Acquisition using the purchase method
and allocated the entire purchase price of $14.5 million to acquired technology.
Additionally,  due to the negative  fair value of  Intellicom  net assets at the
time of acquisition,  the Company recognized  additional  acquired technology in
Intellicom totaling $1.2 million. Furthermore, in connection with the Intellicom
Acquisition,  the Company incurred certain fees and expenses.  Such costs, which
total  $400,000,  were  capitalized  and have also been  allocated  to  acquired
technology,  bringing the total amount allocated to acquired technology to $16.1
million.   The  results  of  operations  of  Intellicom   are  included  in  the
accompanying financial statements from the date of acquisition.

The nature of the  developed  technology  acquired  provides  the Company with a
proprietary  satellite  system,  involving  both  hardware and  software,  which
provides a high-performance,  two-way  satellite-based  Internet access service.
The nature of the  acquired  technology  will,  among  other  things,  allow the
Company to lower the costs of bringing the  Internet to small- and  medium-sized
independent cable operators. The technology acquired has already been tested and
proven  to be a  viable  business.  Therefore,  the  Company  believes  that the
underlying  technology acquired in the Intellicom  Acquisition is not subject to
rapid change,  and the Company feels such acquired  technology  will support the
Company's  business plan over the typical length of its contracts without having
to  significantly  change or enhance  the  acquired  technology.  The  Company's
contracts with its cable  affiliates  typically run from five to seven years. In
determining  how much of the purchase price in excess of the tangible book value
of Intellicom to allocate to acquired  technology,  the Company  considered that
there was little value ascribable to other intangible  assets,  such as customer
lists or workforce. Rather, the Company, after careful consideration, determined
that the fair market  value of the  acquired  technology  is  equivalent  to the
intangible assets acquired in this acquisition.  The Company, therefore, will be
amortizing this amount by the straightline  method over a period of seven years,
the term of a typical cable affiliate contract as well as the anticipated useful
life of this acquired technology.

The  following   unaudited  pro  forma   financial   information   presents  the
consolidated  results  of the  Company  as if  the  Intellicom  Acquisition  had
occurred as of October 1, 1997, and includes  adjustments  for  amortization  of
acquired technology and interest expense related to the Debt Consideration. This
pro forma  financial  information  does not  necessarily  reflect the results of
operations  as they would have been if the Company had  acquired the entities as
of October 1, 1997.  Unaudited pro forma consolidated  results of operations are
as follows (in thousands, except per share data):

                                       Three Months Ended     Six Months Ended
                                           March 31,              March 31,
                                      -------------------   --------------------
                                        1999      1998         1999      1998
                                      ---------  --------   ---------  ---------

Net sales..........................    $ 1,264    $  940     $ 2,285   $ 1,844
Net loss applicable to common
    shares.........................     (8,725)   (1,887)    (16,877)   (4,950)
Basic and diluted net loss
    applicable to common shares....      (0.94)    (0.27)      (1.91)    (0.71)



<PAGE>



4.    Acquired Technology and Other Intangibles

Acquired   technology  and  other  intangibles  consist  of  the  following  (in
thousands):

                                         March 31,         September 30,
                                            1999                1998
                                      ----------------    ------------------

 Acquired technology..................    $  16,075              $     --
 Cable affiliate launch incentives....        2,296                    --
 Goodwill.............................        1,244                 1,244
                                      ----------------    ------------------
                                             19,615                 1,244
 Accumulated amortization.............       (1,908)                 (933)
                                      ================    ==================
                                          $  17,707              $    311
                                      ================    ==================

In July 1998, the Company  adopted its Cable  Affiliate  Incentive  Program (the
"Program"). This Program provides an additional incentive to the Company's cable
affiliates to launch the Company's ISP Channel,  Inc. ("ISP  Channel")  Internet
services.  Under the Program,  the Company offers to pay incentive  bonuses,  in
cash or shares of common stock,  to qualifying  cable  affiliates who enter into
exclusive, multiple-year contracts with ISP Channel. These launch incentives are
paid out over  the life of the  contract  in  relation  to the  roll-out  of ISP
Channel  services at each installed  cable  head-end.  In accordance  with these
terms,  the Company  capitalizes  these cable  affiliate  launch  incentives and
amortizes them over the life of each respective contract.

In February  1999,  the Company  entered into a license  agreement  with Inktomi
Corporation ("Inktomi",  the "Inktomi Licensing Agreement") allowing the Company
rights to install certain  Inktomi caching  technology into 500 of the Company's
cable and satellite  network  products.  The purchase  price for the license was
$4.0 million, of which the first $1.0 million was paid with 65,843 shares of the
Company's  common  stock and the  remaining  amount is  payable in cash in eight
subsequent  quarterly  payments of  $375,000.  The Inktomi  Licensing  Agreement
allows the Company to purchase up to 500  additional  licenses  during the first
four years of the agreement.  The first licenses are expected to be installed in
the third quarter of fiscal 1999. These prepaid license fees of $1.0 million are
presented as other current  assets on the  accompanying  consolidated  condensed
balance sheet as of March 31, 1999.

5.    Long-Term Debt and Debt Issuance Costs

On January 12, 1999, the Company  executed an agreement  with two  institutional
investors  whereby  the  Company  issued  $12.0  million in senior  subordinated
convertible notes (the "Notes"). Such Notes bear an interest rate of 9% per year
and mature in 2001.  These Notes are convertible into the Company's common stock
with an initial  conversion  price of $17.00  per share  until July 1, 1999 and,
thereafter,  at the lower of $17.00  per share and the lowest  five-day  average
closing bid price of the Company's common stock during the 30-day trading period
ending one day prior to the applicable conversion date. In connection with these
Notes,  the Company issued to these investors  warrants to purchase an aggregate
of 300,000 shares of the Company's common stock. These warrants have an exercise
price of $17.00 per share and expire in 2003.

The  costs  related  to  the  issuance  of the  Notes  and  other  miscellaneous
financings,  including the value of the warrants  issued in connection  with the
Notes and other financings, were capitalized and are being amortized to interest
expense using the  effective  interest  method over the life of the debt.  These
debt issuance costs are presented as other assets, net of amortization,  of $4.1
million on the accompanying consolidated condensed balance sheet as of March 31,
1999.

On February 5, 1999, a single holder of the Company's 9% convertible  debentures
due 2000 converted a debenture in the face amount of $402,000 into 59,483 shares
of the Company's  common stock.  These 9% debentures have a conversion  price of
$6.75 per share of common stock.


<PAGE>



Long-term debt is summarized as follows (in thousands):

                                             March 31,         September 30,
                                                1999                1998
                                          ----------------    ------------------

Bank debt.................................     $   2,167           $    5,120
Senior subordinated convertible notes.....        12,000                   --
Convertible subordinated notes............         3,549                3,951
Promissory note...........................         2,000                   --
Other.....................................         1,765                  690
                                          ----------------    ------------------
                                                  21,481                9,761
Less current portion......................          (933)                (541)
                                          ----------------
                                                              ==================
                                               $  20,548            $   9,220
                                          ================    ==================

6.    Redeemable Convertible Preferred Stock

In November  1998,  the Company  issued an aggregate of 413,018 shares of common
stock  pursuant  to the  conversion  of the  remaining  3,100.78  shares  of the
Company's  outstanding  Series A redeemable  convertible  preferred  stock.  The
Series A redeemable  convertible  preferred stock,  including accrued dividends,
was converted into common shares at the conversion  price of $7.56 per share. As
of March 31, 1999, there was no Series A redeemable  convertible preferred stock
outstanding.

In February  1999,  the Company  issued an aggregate of 782,352 shares of common
stock  pursuant  to the  conversion  of the  remaining  10,251.56  shares of the
Company's  outstanding  Series B redeemable  convertible  preferred  stock.  The
Series B redeemable  convertible  preferred stock,  including accrued dividends,
was converted into common shares at the conversion price of $13.20 per share. As
of March 31, 1999, there was no Series B redeemable  convertible preferred stock
outstanding.

During the quarter ended December 31, 1998,  the Company  declared a dividend on
both its  outstanding  Series B redeemable  convertible  preferred stock and its
outstanding Series C redeemable convertible preferred stock, payable on December
31, 1998 to the  respective  stockholders  of record at the close of business on
December 28, 1998. Dividends for the Series B redeemable  convertible  preferred
stock, payable at a rate of 5%, were paid at the Company's option in the form of
126.56  additional  shares  of the  Company's  Series B  redeemable  convertible
preferred  stock.  Dividends for the Series C redeemable  convertible  preferred
stock, payable at a rate of 5%, were paid at the Company's option in the form of
94.14  additional  shares  of the  Company's  Series  C  redeemable  convertible
preferred stock. In addition,  the Company accrued for dividends on its Series A
redeemable  convertible preferred stock through the date of conversion at a rate
of 5%.  Dividends  for the  quarter  ended  December  31,  1998,  were valued at
$243,000.

During the quarter ended March 31, 1999, the Company  declared a dividend on its
outstanding Series C redeemable  convertible  preferred stock,  payable on March
31, 1999 to the  respective  stockholders  of record at the close of business on
March 26,  1999.  Dividends  for the Series C redeemable  convertible  preferred
stock,  payable at a rate of 5%, were paid at the  Company's  option in cash. In
addition,  the  Company  accrued  for  dividends  on  its  Series  B  redeemable
convertible  preferred  stock  through the date of  conversion  at a rate of 5%.
Dividends for the quarter ended March 31, 1999, were valued at $171,000.

7.    Stock Options and Warrants

The following table summarizes the outstanding  options and warrants to purchase
shares of common stock for the six months ended March 31, 1999:


<PAGE>


<TABLE>
<CAPTION>

                                                                                             Outstanding
                               Outstanding options          Outstanding warrants         options and warrants
                            ---------------------------    ------------------------    ------------------------
                                           Weighted                      Weighted                    Weighted
                                           average                       average                     average
                                           exercise                      exercise                    exercise
                             Shares          price         Shares         price         Shares        price
                            -----------    ------------    ---------     ----------    ----------    ----------


<S>                         <C>                 <C>        <C>              <C>        <C>                <C>  
Outstanding as of
   September 30, 1998...    1,370,125           $7.42      832,399          $9.27      2,202,524          $8.12

Granted.................       65,000           $7.38      303,013         $17.13        368,013         $15.41
Exercised...............     (218,413)          $6.17      (187,207)        $6.97      (405,620)          $6.54
Canceled................      (20,700)          $6.88       (28,142)       $10.12       (48,842)          $8.75
                            -----------                    ---------                   ----------

Outstanding as of
   March 31, 1999.....      1,196,012           $7.69      920,063         $12.30      2,116,075          $9.69
                            ===========                    =========                   ==========
</TABLE>

In  accordance  with  Statement  of  Financial  Accounting  Standards  No.  123,
Accounting for Stock-Based Compensation,  ("SFAS 123"), the Company has recorded
a total of $2.5 million of deferred  compensation charges with respect to 90,000
option  shares  issued to  consultants  beginning  in May 1998.  These  deferred
compensation charges are being amortized, on an accelerated basis, in accordance
with Financial  Accounting Standards Board Interpretation No. 28, Accounting for
Stock Appreciation  Rights and Other Variable Stock Option or Award Plans, ("FIN
28").  The Company has  amortized  $1.0 million of these charges for the quarter
ended March 31, 1999.

8.    Segment Information

The Company  operates  principally  in two business  segments:  (i)  cable-based
Internet  services through its wholly-owned  subsidiary,  ISP Channel,  and (ii)
satellite-based   Internet   services  through  its   wholly-owned   subsidiary,
Intellicom.  The  Company  previously  reported  two  other  business  segments:
document management and telecommunications.  However, these two segments are now
reported  as  discontinued  operations  (see Note 2).  Segment  information  for
continuing operations is as follows (in thousands):
<TABLE>
<CAPTION>

                                                         Three Months Ended                Six Months Ended
                                                             March 31,                        March 31,
                                                     ----------------------------    ----------------------------
                                                         1999           1998            1999            1998
                                                     ------------    ------------    ------------    ------------
<S>                                                      <C>              <C>            <C>              <C>   
Net sales:
    Subscriber fees........................               $   203         $   65          $  382          $  105
    Modem fees and other...................                   172              8             264              15
    Dial-up fees...........................                   174            178             347             346
                                                     ------------    ------------    ------------    ------------
       ISP Channel.........................                   549            251             993             466
    Intellicom.............................                   478             --             478              --
                                                     ============    ============    ============    ============
                                                         $  1,027         $  251         $ 1,471          $  466
                                                     ============    ============    ============    ============
Operating expenses:
    Sales and marketing....................              $  2,318         $  218         $ 4,325          $  387
    Engineering............................                   727            115           1,465             215
    General and administrative.............                 2,038            252           3,778             454
                                                     ------------    ------------    ------------    ------------
       ISP Channel.........................                 5,083            585           9,568           1,056
    Intellicom.............................                  345              --             345              --
    Corporate..............................                  (23)            409             103             872
    Depreciation, amortization and
       compensation expense related to
       options and warrants................                 1,826            176           2,968             346
                                                     ============    ============    ============    ============
                                                         $  7,231        $ 1,170        $ 12,984         $ 2,274
                                                     ============    ============    ============    ============
Loss from continuing operations:
    ISP Channel............................             $ (5,503)        $  (623)       $(11,062)      $ (1,144)
    Intellicom.............................                 (605)              --           (605)             --
    Corporate..............................                 (987)           (430)         (1,144)          (914)
                                                     ============    ============    ============    ============
                                                        $ (7,095)       $ (1,053)       $(12,811)      $ (2,058)
                                                     ============    ============    ============    ============
</TABLE>

9.    Supplemental Cash Flow Information

The following is  supplemental  cash flow  information  for the six months ended
March 31 (in thousands):
<TABLE>
<CAPTION>

                                                                              1999             1998
                                                                          -------------    -------------

<S>                                                                          <C>                <C>   
Cash paid during the period for:
  Interest..........................................................        $    707           $  505

Supplemental non-cash transactions:
   Acquisition of Intellicom-Equity Consideration....................        $ 10,969           $   --
   Acquisition of Intellicom-Debt Consideration......................           3,000               --
   Acquisition of Intellicom-debt acquired...........................             600               --
   Notes receivable received in connection with disposal of
      telecommunications segment.....................................           4,500               --
   Shares of purchaser received in connection with disposal of
      telecommunications segment.....................................             498               --
   Common stock issued for the conversion of redeemable convertible
      preferred stock................................................          11,379               --
   Common stock issued for the conversion of subordinated notes......             402              210
   Convertible debt issued for acquisition of equipment leases.......              --            1,444
   Value assigned to common stock warrants issued upon the issuance
      of long-term debt..............................................           4,334               --
   Value assigned to common stock warrants issued upon the issuance
      of redeemable convertible preferred stock......................              --              435
   Equipment acquired by capital lease...............................           2,628               --
   Prepaid license fees paid with issuance of common stock...........           1,000               --
   Deferred compensation associated with the issuance of common
      stock options..................................................           2,327               --
   Preferred dividends paid with the issuance of additional
      redeemable convertible preferred stock.........................             221               --
   Preferred dividends paid with the issuance of common stock........              98               --
</TABLE>

10.   Subsequent Events

On April 12,  1999,  the Company  issued  660,000  shares of common  stock to an
investor  in  exchange  for  $15.0  million  in cash and a  modification  of the
affiliate  agreement  between  the  Company  and  Teleponce  Cable  TV,  a cable
affiliate,  that is controlled  by the  investor.  Of the $15.0 million in gross
proceeds,  $300,000 had already been paid to the Company as of March 31, 1999 as
a deposit.

On April 13, 1999, the Company held its annual  stockholders'  meeting.  At this
meeting, the following proposals, among others, were approved: (i) the number of
common shares authorized was increased from 25,000,000 to 100,000,000;  (ii) the
Company's  1998 Stock  Incentive  Plan (the "1998 Plan")  under which  3,350,668
shares  of  common  stock  were  reserved  for  issuance;  (iii) the sale of the
Company's  document  management  segment  (see Note 2);  and (iv) the  Company's
reincorporation in Delaware.

As a result of the adoption of the 1998 Plan, under Accounting  Principles Board
Opinion No. 25,  Accounting  for Stock  Issued to  Employees,  ("APB  25"),  the
Company will recognize a non-cash  compensatory  charge over the next four years
totaling  approximately  $79.0 million relating to the issuance of stock options
contingent upon  stockholder  approval of the 1998 Plan.  During the period from
October 1998 to April 1999, the Company  granted to certain  employees,  pending
stockholder  approval,  an aggregate of 1,618,550  incentive  and  non-qualified
common stock options under the 1998 Plan at a weighted average exercise price of
$11.10 per share.  As a result of the 1998 Plan adoption,  although all of these
options  were  granted at what was then the fair market  value of the  Company's
common  stock on the date of  grant,  the  Company  must  recognize  a  non-cash
compensation  charge for the  difference  between the various  grant  prices and
$59.875,  the  closing  price  of the  Company's  common  stock  on the  date of
stockholder approval of the plan.  Accordingly,  the Company will record a total
charge of  approximately  $79.0  million,  which will be amortized as a non-cash
compensation  expense over the four year vesting  period of such stock  options,
including a catch-up adjustment for the vesting period from the date of grant to
the date of  approval of the plan.  This  non-cash  compensation  charge and the
resulting  amortization will be recognized  initially in the quarter ending June
30, 1999.

On April 28, 1999,  the Company issued  4,600,000  shares of its common stock at
$33.00 per share in an underwritten  secondary public offering  resulting in net
proceeds to the Company of approximately $142.0 million.






<PAGE>



Item 2. Management's  Discussion and Analysis of Financial Condition and Results
of Operations

General

This  Form 10-Q  contains  forward-looking  statements  that  involve  risks and
uncertainties.  The actual results of SoftNet Systems, Inc. and its subsidiaries
could differ significantly from those set forth herein. Factors that could cause
or  contribute  to such  differences  include,  but are not  limited  to,  those
discussed in "Factors Affecting the Company's Operating Results" as set forth in
the  Company's  annual  report on Form 10-K/A for the year ended  September  30,
1998, as filed with the Securities and Exchange  Commission,  and  "Management's
Discussion  and Analysis of Financial  Condition and Results of  Operations"  as
well as those discussed elsewhere in this quarterly report. Statements contained
herein that are not historical  facts are  forward-looking  statements  that are
subject to the safe harbor created by the Private  Securities  Litigation Reform
Act of 1995. Words such as "believes",  "anticipates",  "expects", "intends" and
similar expressions are intended to identify forward-looking statements, but are
not the exclusive means of identifying  such  statements.  A number of important
factors  could  cause our actual  results  for fiscal  1999 and beyond to differ
materially  from  past  results  and  those  expressed  in  any  forward-looking
statements  made by us, or on our behalf.  We undertake no obligation to release
publicly the results of any revisions to these  forward-looking  statements that
may be made to  reflect  events or  circumstances  after  the date  hereof or to
reflect the occurrence of unanticipated events.

The following  discussion  of our financial  condition and results of operations
should  be read  in  conjunction  with,  and is  qualified  in its  entirety  by
reference  to, our  Consolidated  Financial  Statements  and the  related  Notes
thereto  appearing  in our  annual  report  on Form  10-K/A  for the year  ended
September 30, 1998, as filed with the Securities and Exchange Commission and our
Consolidated  Condensed Financial Statements and related Notes thereto appearing
elsewhere in this  quarterly  report.  Our fiscal year ends September 30 and the
first quarter of the fiscal year ends  December 31.  "Fiscal 1999" refers to the
twelve months ending September 30, 1999 with similar  references to other twelve
month periods ending September 30.

Overview

During fiscal 1998, we made a strategic  decision to focus on becoming,  through
our wholly-owned subsidiary, ISP Channel, (which was formerly known as MediaCity
World, Inc.), the dominant  cable-based  provider of high-speed Internet access,
as well as of other digital communications  services, to homes and businesses in
the franchise areas of certain small- and medium-sized cable systems. As part of
this new focus, on February 9, 1999 we completed the purchase of Intellicom, the
former Xerox Skyway  Network.  We believe that  integrating  this new technology
into our existing  business plan will allow us to cost  effectively  provide our
ISP  Channel  service to  smaller  systems  in more  remote  areas as well as to
certain other markets including  apartment  buildings,  hotels,  hospitals,  and
schools,  thereby  decreasing our cost basis and increasing our potential market
size.  Also in line with this strategy,  we determined in 1998 to divest our two
other businesses:  MTC, a wholly-owned  subsidiary  offering document management
solutions,  and KCI, a wholly-owned subsidiary which sold and serviced telephone
systems,  third party  computer  hardware  and  application-oriented  peripheral
products.  On  February  12,  1999,  we  completed  the  divestiture  of KCI. In
addition,  on November 5, 1998,  we entered into a letter of intent for the sale
of MTC,  which  we  modified  in  March  1999.  Since  July  27,  1998,  we have
reclassified and reported KCI in discontinued operations.  On April 13, 1999, we
obtained  stockholder  approval to divest MTC and therefore are now treating MTC
as a  discontinued  operation.  We have  accordingly  restated the  Consolidated
Condensed Financial Statements appearing elsewhere in this quarterly report.

We began providing Internet services following our acquisition of ISP Channel in
June 1996. While we seek to maintain and build the traditional  dial-up Internet
access business acquired at, and built up since that time, our primary objective
is to become  the  dominant  provider  of  high-speed  Internet  access  via the
existing  cable  television  infrastructure  to  homes  and  businesses  in  the
franchise areas of small- and medium-sized cable television  systems. We seek to
enter into exclusive multi-year agreements with cable affiliates that permit ISP
Channel to provide  high-speed  Internet  access and other services to homes and
businesses  served by these  cable  systems  through  cable  modems  and, in the
future, through television set-top boxes.


<PAGE>


On February 9, 1999, we completed the purchase of  Intellicom.  Through use of a
proprietary satellite system that utilizes VSAT technology, Intellicom currently
provides  two-way  Internet  connectivity  to local Internet  service  providers
("ISPs"),  school systems and businesses,  primarily located in remote and rural
areas. Intellicom's VSAT network provides coverage and thus allows connectivity,
throughout the 48 lower states as well as in southern  Canada,  southern Alaska,
Puerto Rico, certain parts of Latin America and the Caribbean. Intellicom offers
a wide range of Internet  services  based on its  proprietary  service called T1
Plus, that presently offers users up to 2 Mbps data transfer rates.

Additionally,  while  Intellicom  will  continue  to market its  services to its
current market  business,  it is our intention that Intellicom will also provide
ISP  Channel  with  the  in-house  ability  to  bypass  many  of the  high  cost
terrestrial  telephone links that ISP Channel has  historically  used to connect
the  cable  head-ends  of its  affiliated  cable  operators  to its own  network
operations  center.  We believe that  integrating  this new technology  into our
existing business plan will allow us to cost effectively provide our ISP Channel
service to  smaller  systems in more  remote  areas as well as to certain  other
markets including apartment buildings,  hotels,  hospitals, and schools, thereby
decreasing our cost structure and increasing our potential market size.

ISP Channel Affiliates. As of May 3, 1999, ISP Channel had contracts for service
with 38 cable operators  representing 172 cable systems and  approximately  1.74
million homes passed. A total of 28 of these systems, representing approximately
331,000 homes passed,  have been equipped and have begun  offering our services.
As of May  3,  1999,  the  Company  had  over  2,800  residential  and  business
subscribers on its ISP Channel service.

In order to expand our cable-based  Internet subscriber base  significantly,  we
expect to aggressively pursue affiliation  agreements with other cable operators
thereby  providing us with the exclusive  right to market  cable-based  Internet
services to  existing  cable  television  subscribers  in such cable  operators'
systems.  We  anticipate  that this  policy of rapid  deployment  will result in
substantial capital expenditures, operating losses and negative cash flow in the
near term. While we believe that we currently have sufficient cash and financing
sources available to fund our operations through the year 2000, we cannot assure
you, however,  that we will be able to access additional  capital to finance our
strategy in the longer term or to  implement  our  strategy or achieve  positive
cash flow or profitability in a timely fashion, or at all

ISP Channel Revenue Sources. In providing Internet services,  we receive revenue
from the provision of (i) cable  modem-based  Internet  access services and (ii)
traditional  dial-up  Internet  access  services.  Currently,  we or, in certain
cases,  our local  cable  affiliate,  typically  charge  new  cable  modem-based
Internet access subscribers a one-time connection fee of $99, which fee includes
modem installation but excludes any required  modification of the existing cable
television  connection which is usually  performed by the local cable affiliate.
Thereafter, each subscriber pays a monthly access fee, which is currently as low
as $29.95 per month,  and it is our  expectation  that such rates will  decrease
over time.  We  anticipate  that for the  foreseeable  future we will purchase a
majority of the cable modems used by subscribers,  who will be charged a nominal
lease or rental  charge.  We do not charge new dial-up  subscribers a connection
fee, but we do charge them a monthly access fee of approximately $20.

For our cable-based  Internet services,  we typically give 25% of monthly access
revenues to cable  affiliates  for the first 200  subscribers in each system and
50% thereafter. For other services, such as Internet-based telephony, e-commerce
and advertising,  we expect to give between 25% and 50% of these revenues to the
cable affiliates.  We report these revenues net of the percentage we give to our
cable  affiliates.  We expect to retain all  revenue  from cable modem lease and
rental income.  Depending on competitive  market  conditions,  these pricing and
revenue sharing parameters could change over time.

In addition to  connection  fees and monthly  access  fees,  we intend to pursue
additional  revenue  opportunities  from Internet  advertising,  e-commerce  and
Internet-based  telephony.  We also  intend to pursue  long  distance  telephone
services and telephony debit and credit cards.

In the future, as digital set-top boxes become available and are introduced into
our affiliated  cable  systems,  we expect to charge those  subscribers  monthly
access fees comparable to those now charged to traditional dial-up  subscribers.
We also  expect to charge  customers  a set-top  connection  fee to help  defray
installation expenses.
<PAGE>

Intellicom  Revenue  Sources.  Intellicom  provides  a  comprehensive  range  of
products and services,  supported by a stable,  low-cost  VSAT system,  based on
two-way satellite technology,  that are primarily intended to provide high-speed
access to the Internet.  Connectivity  services are provided  through a range of
VSAT options for customers  requiring  broadband  access to the Internet.  These
customers  execute term service  agreements and are typically charged a one-time
installation fee of $3,000 per site.  Intellicom then receives monthly recurring
access fees typically  ranging from $1,350 to $3,300 per month per site based on
data transfer rates. These customers then provide dial-up  connectivity to their
end-user base using Intellicom as their primary gateway to the Internet and rely
on Intellicom to connect,  secure and maintain their network  integrity.  Unlike
its competitors,  Intellicom designs and out-source  manufactures VSAT equipment
specifically for its applications.

Intellicom  also sells a variety of products and  services,  including  the Edge
Connector (TM) which is a turnkey  Internet server with an integrated  series of
application  software packages and CachePlus (TM),  Intellicom's network caching
solution. All of these products and services are integrated to provide customers
with a total solution to their Internet application needs.

Finally,  Intellicom also provides  traditional  data  processing  services to a
number of large commercial  users. This business is considered a legacy business
and is anticipated to decline rapidly over the next year.

Cost of Services. Costs to us include installation costs, connectivity costs and
in the case of cable modems that are sold or financed, the cost of such modems.

Installation costs vary by type of connectivity and type of customer.  We charge
new cable modem  subscribers a one-time fee to defray the costs of installation,
which includes labor and overhead. While currently the installation fee does not
cover the entire  cost  incurred  by us, we expect  over time that  installation
costs will decline as cable modems become more  standardized  and as they become
commercially  available  both through  retail outlets and eventually as standard
equipment bundled in new personal computers.

Connectivity costs include the cost of connection to the public switch telephone
network.  Such  connections  are required,  among other reasons,  to service our
dial-up customers as well as to provide those cable modem customers located on a
one-way cable system the return path, or upstream link, to our equipment located
at the cable operator's head-end.  Accordingly, we incur higher costs associated
with providing our services  through  one-way cable systems.  Consequently,  the
rate at which our cable  affiliates  upgrade  their  cable  systems  to  two-way
capability will have a direct impact on our profit margins.

In addition,  we incur  telecommunications  costs  associated  with our Internet
backbone    connectivity   as   well   as   costs    associated   with   leasing
telecommunications  capacity  such as fiber where such  capacity is used,  among
other  things,  to link our  equipment at the cable system  head-end back to our
network operations center in Mountain View,  California.  We also incur expenses
associated with satellite capacity required for Intellicom, which is leased from
GE Americom and Satmex.  We  anticipate  that the  utilization  of  Intellicom's
network  as  a  substitute  for  third  party  terrestrial  links  will  provide
significant cost savings to us as it grows. There are two major cost benefits to
us in using  Intellicom's  VSAT  capacity to  supplement  or replace our current
landline-based  communications  infrastructure.  First, for downstream  Internet
traffic,  it enables us to simultaneously  broadcast data from one single source
to our entire network of  head-end-based  receivers  which, in conjunction  with
other factors including "caching" produces  significant  efficiency  improvement
over comparable landline systems. Second, for upstream traffic, it permits us to
allocate the necessary  capacity required by each head-end in smaller increments
(and consequently  lower cost) than would be available using terrestrial  links,
such as T1 lines.

Operating Expenses.  Operating expenses include (i) sales and marketing expense,
which  consists  primarily of salaries,  commission,  and  promotional  expenses
associated with the direct  marketing and sales effort,  as well as the expenses
associated with telemarketing,  customer care and new business development; (ii)
engineering  expense,  which  consists  primarily of salaries and related  costs
associated with our network  operations  center,  field engineering and research
staff; and (iii) general and administrative expense, which consists primarily of
salaries and associated  professional  costs related to our executive,  finance,
legal, human resources and other administrative  functions.  We expect operating
expenses to increase  significantly  as we ramp-up our efforts  associated  with
<PAGE>

increasing cable modem customer  penetration in our existing markets,  and as we
grow our business by introducing our services in new markets.

Also  included  in  operating   expenses  is  depreciation   and   amortization.
Amortization  expense  includes the capitalized  costs associated with our cable
affiliate  incentive program,  as well as the costs associated with goodwill and
other intangible assets. As a result of the Intellicom acquisition,  we recorded
a significant  amount of intangible assets,  classified as acquired  technology,
which will adversely affect our earnings and  profitability  for the foreseeable
future.  If the amount of such recorded  acquired  technology is increased or we
have  future  losses and are unable to  demonstrate  our  ability to recover the
amount of acquired technology  recorded during such time periods,  the period of
amortization  could  be  shortened,  which  may  further  increase  amortization
charges.

Compensation  Expense Related to Stock Options and Warrants.  We record non-cash
compensation  expense  related to the value  attributed  to common stock options
granted to  non-employees.  The  non-vested  portions of these option grants are
revalued on a quarterly basis with respect to the then current fair market value
of our common stock using the Black-Scholes  method. These non-cash compensation
expenses are then  amortized over their  respective  vesting  periods,  which is
typically three years.

In addition to the above, we granted to certain employees,  pending  stockholder
approval,  an aggregate of 1,618,550  incentive and  non-qualified  common stock
options under our 1998 Stock Incentive Plan at a weighted average exercise price
of $11.10 per option. This plan received stockholder approval on April 13, 1999.
As a result,  although  all of these  options  were  granted  over a period from
October  1998 to April 1999 at what was then the fair market value of our common
stock on the date of grant, we must recognize a non-cash compensation charge for
the difference  between the various grant prices and $59.875,  the closing price
of  our  common  stock  on  the  date  of  stockholder  approval  of  the  plan.
Accordingly,   we  will  record  a  total   non-cash   compensation   charge  of
approximately $79.0 million,  which will be amortized over the four year vesting
period of such stock  options,  including a catch-up  adjustment for the vesting
period from the date of grant to the date of approval of the plan. This non-cash
compensation charge and the resulting  amortization will be recognized initially
in the quarter ending June 30, 1999.

Capital  Expenditures.  In order to pursue our business plan, we expect to incur
significant  capital  expenditures  to provide  our turnkey  solution  for cable
operators,  principally  relating to the installation of head-end  equipment and
the purchase of customer  premise  equipment  such as cable modems and satellite
service related equipment.  The cost of cable modems is expected to decline over
time as economies of scale in production  and the advent of new market  entrants
in manufacturing  cable modems push down prices.  However, we recognize that, in
line with experience in other subscription  service  industries,  we may need to
subsidize both the cost of  installation  and the cable modem  equipment for the
customer.  Such expenditures,  however, are expected to be offset in part by the
savings  resulting  from  decreased  costs of  installation  and prices for such
equipment  as  equipment  is  standardized  and  production   volumes  increase,
respectively.

Results of operations  for the Three Months Ended March 31, 1999 compared to the
Three Months Ended March 31, 1998

Net Sales.  Consolidated net sales increased $776,000,  or 309%, to $1.0 million
for the three months ended March 31, 1999,  as compared to $251,000 for the same
period in 1998.  Net sales  for ISP  Channel  increased  $298,000,  or 119%,  to
$549,000 for the three months ended March 31, 1999,  as compared to $251,000 for
the same  period in 1998,  as a result of  signing up new cable  affiliates  and
obtaining new cable modem  customers.  Net sales  associated  with ISP Channel's
subscriber  fees increased  $138,000,  or 212%, to $203,000 for the three months
ended March 31,  1999,  as compared to $65,000 for the same period in 1998.  Net
sales   associated  with  the  installation  of  cable  modems  to  ISP  Channel
subscribers  increased $164,000 to $172,000 for the three months ended March 31,
1999,  as  compared  to $8,000  for the same  period in 1998.  We  believe  that
subscriber fee and cable modem  installation  revenues will continue to increase
as ISP Channel continues to rollout its business plan. Net sales associated with
the segment's non-cable based dial-up and  business-to-business  Internet access
offerings  decreased  $4,000, or 2%, to $174,000 as compared to $178,000 for the
same period in 1998.
<PAGE>


In addition to the net sales of ISP Channel,  our consolidated net sales for the
quarter  ended March 31, 1999 now  include the results of  Intellicom,  which we
acquired in February 1999. Net sales for Intellicom from the date of acquisition
through March 31, 1999, were $478,000.  Of this total,  $213,000  represents net
sales from Intellicom's core business of satellite-based  Internet services. The
remaining  $265,000  represents  other sources of revenue,  of which the biggest
component  was  $128,000  from  non-satellite-based  data  processing,  a legacy
business for Intellicom.  We believe that satellite-based  revenues will grow in
the future while data  processing  revenues  will  decline as this  component of
Intellicom's business is phased out.

Cost of  Sales.  Consolidated  cost of sales  increased  $757,000,  or 565%,  to
$891,000 for the three months ended March 31, 1999,  as compared to $134,000 for
the same period in 1998. Cost of sales for ISP Channel  increased  $436,000,  or
325%,  to $570,000 for the three  months  ended March 31,  1999,  as compared to
$134,000 for the same period in 1998, as a result of the corresponding growth in
net sales.  The single  largest  component  of ISP  Channel's  cost of sales are
telephony costs, which amounted to $444,000 for the quarter ended March 31, 1999
as compared to $126,000 for the same period in 1998. We believe that these costs
will  remain  the same or  decrease  as a  percentage  of total net sales as ISP
Channel expects to realize some degree of cost savings in its telephony  charges
due to the replacement of high cost terrestrial telephone links in certain areas
with Intellicom's  satellite-based  technology,  which has a lower cost basis in
most cases.

In addition to the cost of sales of ISP Channel,  our consolidated cost of sales
for the quarter  ended  March 31,  1999 now  include the results of  Intellicom,
which we acquired in February 1999.  Cost of sales for Intellicom  from the date
of  acquisition  through  March  31,  1999 were  $321,000.  The  single  largest
component of Intellicom's  cost of sales are the  transponder  fees that it pays
for leased satellite capacity,  which amounted to $128,000 for the quarter ended
March 31, 1999.  We believe  that these costs will  increase as  Intellicom  has
plans to lease segment space on two additional  satellites  during the third and
fourth  quarter  of  1999  in  anticipation  a  more   aggressive   roll-out  of
Intellicom's business plan.

Selling and Marketing.  Consolidated  selling and marketing  expenses  increased
$2.1  million,  or 983%,  to $2.4  million for the three  months ended March 31,
1999, as compared to $218,000 for the same period in 1998. Selling and marketing
expenses for ISP Channel  increased  $2.1 million,  or 963%, to $2.3 million for
the three  months  ended March 31,  1999,  as compared to $218,000  for the same
period in 1998. The  significant  growth in ISP Channel's  selling and marketing
expense  is a result of the  significant  hiring  that we have done to  properly
staff  these  departments  as ISP Channel  launches  its  first-ever  nationwide
marketing  campaign,  "Run with the Fast Crowd" in an effort to add subscribers,
as well as to attract  new cable  affiliates.  We believe  that these costs will
continue to increase as ISP Channel continues to develop its business.

In  addition  to  the  selling  and  marketing  expenses  of  ISP  Channel,  our
consolidated   selling  and  marketing  expenses  now  include  the  results  of
Intellicom,  which we acquired in February 1999.  Selling and marketing expenses
for Intellicom from the date of acquisition through March 31, 1999 were $45,000.
We believe that these costs will  increase as  Intellicom  begins to staff these
functions  in  anticipation  of rolling out its  business  plan to generate  new
customers.

Engineering.  Consolidated  engineering expenses increased $615,000, or 535%, to
$730,000 for the three months ended March 31, 1999,  as compared to $115,000 for
the  same  period  in  1998.  Engineering  expenses  for ISP  Channel  increased
$612,000,  or 532%,  to $727,000 for the three  months ended March 31, 1999,  as
compared to $115,000  for the same period in 1998.  The growth in ISP  Channel's
engineering  expense  is a result of the  hiring  that we have done to  properly
staff this  department as ISP Channel  continues to grow. We believes that these
costs will  continue  to  increase  as ISP  Channel  continues  to  develop  its
business.

In  addition  to the  engineering  expenses  of ISP  Channel,  our  consolidated
engineering expenses now include the results of Intellicom, which we acquired in
February 1999.  Engineering expenses for Intellicom from the date of acquisition
through March 31, 1999 were $3,000. We believe that these costs will increase as
Intellicom  begins to staff these  functions in  anticipation of rolling out its
business plan to generate new customers.

General and  administrative.  Consolidated  general and administrative  expenses
increased  $1.7  million,  or 250%,  to $2.3  million for the three months ended
March 31, 1999, as compared to $661,000 for the same period in 1998. Our general
and administrative expenses increased $1.4 million, or 205%, to $2.0 million for


<PAGE>

the three  months  ended March 31,  1999,  as compared to $661,000  for the same
period in 1998. The growth in our general and administrative expense is a result
of the hiring that we have done to properly staff our administrative,  executive
and finance departments as we continue to grow. We believe that these costs will
continue  to  increase  as  a  result  of  the   continued   expansion   of  our
administrative staff and facilities to support growing operations.

In addition to the  general and  administrative  expenses of ISP Channel and our
corporate operations,  our consolidated general and administrative  expenses now
include the results of Intellicom,  which we acquired in February 1999.  General
and administrative  expenses for Intellicom from the date of acquisition through
March 31,  1999 were  $296,000.  We believe  that these  costs will  increase as
Intellicom begins to staff these functions to support growing operations.

Depreciation  and  Amortization.   Consolidated  depreciation  and  amortization
expenses  increased  $641,000,  or 364%,  to $817,000 for the three months ended
March  31,  1999,  as  compared  to  $176,000  for  the  same  period  in  1998.
Depreciation  and  amortization  for ISP  Channel and our  corporate  operations
increased  $223,000,  or 127%,  to $399,000 for the three months ended March 31,
1999,  as  compared  to  $176,000  for the same  period  in 1998 as a result  of
increased  depreciation  on expanded  property,  plant and  equipment as well as
amortization of costs associated with ISP Channel's Cable  Affiliates  Incentive
Program.  We believe that these  expenses will increase as we continue to expand
our facilities and continues to offer additional incentives to acquire new cable
affiliates.

In addition to the depreciation and amortization expenses of ISP Channel and our
corporate  operations,  our consolidated  depreciation and amortization expenses
now  include  the results of  Intellicom,  which we  acquired in February  1999.
Depreciation  and  amortization   expenses  for  Intellicom  from  the  date  of
acquisition  through March 31, 1999 were $418,000,  of which $383,000 represents
amortization  of  acquired  technology,  the  intangible  asset  created  by the
acquisition  of  Intellicom.  We believe that these  expenses  will  increase as
Intellicom  continues  to expand  its  facilities  and  amortize  the  remaining
acquired technology.

Compensation Expense Related to Stock Options and Warrants. For the three months
ended March 31, 1999, we recognized a non-cash  compensation  expense related to
stock  options  issued to  non-employees  of $1.0  million.  Generally  accepted
accounting   principles   require  that  options  issued  to   non-employees  be
"marked-to-market"  until such time as the options have been earned.  Therefore,
we expect this amount to either  increase or decrease based on the  fluctuations
in the trading price of our common stock.  In addition,  we expect this non-cash
expense to increase as we incurred an  approximate  $79.0 million charge related
to stock options issued to employees  under our 1998 Stock  Incentive Plan prior
to stockholder  approval of the plan. This  approximate  $79.0 million  non-cash
charge will be recognized into expense over the four-year vesting period of such
stock options.

Interest Expense.  Consolidated interest expense increased $422,000, or 227%, to
$608,000 for the three months ended March 31, 1999,  as compared to $186,000 for
the  same  period  in  1998.  This was a result  of  increased  lease  financing
associated with the capital  expansion needs of ISP Channel as well as increased
debt  at the  corporate  level,  including  the  $12.0  million  of  convertible
subordinated  loan notes issued in January 1999,  amortization  of deferred debt
issuance  costs  and  the  promissory   notes  issued  in  connection  with  the
acquisition of Intellicom in February 1999.

In addition to the interest expense of ISP Channel and our corporate operations,
our consolidated interest expense now includes the results of Intellicom,  which
we acquired in February 1999.  Interest  expense for Intellicom from the date of
acquisition  through March 31, 1999 was $31,000 due to Intellicom's prior credit
facilities, which have since been paid off in full.

Other Income.  Other income is primarily  comprised of interest income earned on
our cash and cash  equivalents and reflects  earnings on increased cash and cash
equivalent balances.

Income  Taxes.  We made no provision for income taxes for the three months ended
March 31, 1999, as a result of our net operating loss carry-forward.
<PAGE>

Income (Loss) from Discontinued Operations. We recognized a net loss of $246,000
from operations of our discontinued  telecommunications  and document management
segments  for the three months ended March 31, 1999 as compared to net income of
$19,000  for the  same  period  in  1998.  This  consisted  of a net loss in our
document  management  segment of $251,000  for the three  months ended March 31,
1999,  as compared to $204,000 for the same period in 1998 and net income in our
telecommunications  segment of $5,000 for the three months ended March 31, 1999,
as  compared to $223,000  for the same  period in 1998.  Our  telecommunications
segment,  KCI, sold substantially all of its assets in February 1999. Net income
from this discontinued operation is only through the date of disposition.

Net  Loss.  For the  three  months  ended  March  31,  1999,  we had a net  loss
applicable  to  common  shares  of $8.1  million,  or a loss per share of $0.87,
compared to a net loss of $1.3  million  for the same period in 1998,  or a loss
per share of $0.18.

Results of  operations  for the Six Months Ended March 31, 1999  compared to the
Six Months Ended March 31, 1998

Net Sales.  Consolidated  net sales  increased  $1.0  million,  or 216%, to $1.5
million for the six months ended March 31, 1999, as compared to $466,000 for the
same period in 1998. Net sales for ISP Channel increased  $527,000,  or 113%, to
$993,000 for the six months  ended March 31,  1999,  as compared to $466,000 for
the same  period in 1998,  as a result of  signing up new cable  affiliates  and
obtaining new subscribers.  Net sales  associated with ISP Channel's  subscriber
fees increased $277,000, or 264%, to $382,000 for the six months ended March 31,
1999, as compared to $105,000 for the same period in 1998. Net sales  associated
with the  installation  of cable  modems to ISP  Channel  subscribers  increased
$249,000 to $264,000  for the six months  ended March 31,  1999,  as compared to
$15,000 for the same period in 1998.  We believe that  subscriber  fee and cable
modem  installation  revenues will continue to increase as ISP Channel continues
to rollout its business plan. Net sales associated with the segment's  non-cable
based  dial-up and  business-to-business  Internet  access  offerings  increased
$1,000 to $347,000 as compared to $346,000 for the same period in 1998.

In addition to the net sales of ISP Channel,  our consolidated net sales for the
quarter  ended March 31, 1999 now  include the results of  Intellicom,  which we
acquired in February 1999. Net sales for Intellicom from the date of acquisition
through March 31, 1999, were $478,000.  Of this total,  $213,000  represents net
sales from Intellicom's core business of satellite-based  Internet services. The
remaining  $265,000  represents  other sources of revenue,  of which the biggest
component  was  $128,000  from  non-satellite-based  data  processing,  a legacy
business for Intellicom.  We believe that satellite-based  revenues will grow in
the future while data  processing  revenues  will  decline as this  component of
Intellicom's business is phased out.

Cost of Sales.  Consolidated  cost of sales increased $1.0 million,  or 419%, to
$1.3 million for the six months  ended March 31,  1999,  as compared to $250,000
for the same period in 1998. Cost of sales for ISP Channel  increased  $727,000,
or 291%,  to $977,000 for the six months  ended March 31,  1999,  as compared to
$250,000 for the same period in 1998, as a result of the corresponding growth in
net sales.  The single  largest  component  of ISP  Channel's  cost of sales are
telephony costs, which amounted to $773,000 for the quarter ended March 31, 1999
as compared to $232,000 for the same period in 1998. We believe that these costs
will  remain  the same or  decrease  as a  percentage  of total net sales as ISP
Channel expects to realize some degree of cost savings in its telephony  charges
due to the replacement of expensive T1 lines in certain areas with  Intellicom's
satellite-based technology, which has a lower cost basis in most cases.

In addition to the cost of sales of ISP Channel,  our consolidated cost of sales
for the quarter  ended  March 31,  1999 now  include the results of  Intellicom,
which we acquired in February 1999.  Cost of sales for Intellicom  from the date
of  acquisition  through  March  31,  1999 were  $321,000.  The  single  largest
component of Intellicom's  cost of sales are the  transponder  fees that it pays
for leased satellite capacity,  which amounted to $128,000 for the quarter ended
March 31, 1999.  We believe  that these costs will  increase as  Intellicom  has
plans to lease segment space on two additional  satellites  during the third and
fourth  quarter  of  1999  in  anticipation  of a more  aggressive  roll-out  of
Intellicom's business plan.

Selling and Marketing.  Consolidated  selling and marketing  expenses  increased
$4.0  million  to $4.4  million  for the six months  ended  March 31,  1999,  as

<PAGE>

compared to $387,000 for the same period in 1998. Selling and marketing expenses
for ISP Channel  increased $3.9 million to $4.3 million for the six months ended
March 31,  1999,  as  compared  to  $387,000  for the same  period in 1998.  The
significant growth in ISP Channel's selling and marketing expense is a result of
the significant  hiring that we have done to properly staff these departments as
ISP Channel launches its first-ever nationwide marketing campaign, "Run with the
Fast  Crowd" in an effort to add  subscribers,  as well as to attract  new cable
affiliates. We believe that these costs will continue to increase as ISP Channel
continues to develop its business.

In  addition  to  the  selling  and  marketing  expenses  of  ISP  Channel,  our
consolidated   selling  and  marketing  expenses  now  include  the  results  of
Intellicom,  which we acquired in February 1999.  Selling and marketing expenses
for Intellicom from the date of acquisition through March 31, 1999 were $45,000.
We believe that these costs will  increase as  Intellicom  begins to staff these
functions  in  anticipation  of rolling out its  business  plan to generate  new
customers.

Engineering.  Consolidated engineering expenses increased $1.3 million, or 583%,
to $1.5 million for the six months ended March 31, 1999, as compared to $215,000
for the same period in 1998. Engineering expenses for ISP Channel increased $1.3
million,  or 582%,  to $1.5 million for the six months ended March 31, 1999,  as
compared to $215,000  for the same period in 1998.  The growth in ISP  Channel's
engineering  expense  is a result of the  hiring  that we have done to  properly
staff this  department  as we continue to grow. We believe that these costs will
continue to increase as ISP Channel continues to develop its business.

In  addition  to the  engineering  expenses  of ISP  Channel,  our  consolidated
engineering expenses now include the results of Intellicom, which we acquired in
February 1999.  Engineering expenses for Intellicom from the date of acquisition
through March 31, 1999 were $3,000. We believe that these costs will increase as
Intellicom  begins to staff these  functions in  anticipation of rolling out its
business plan to generate new customers.

General and  administrative.  Consolidated  general and administrative  expenses
increased $2.9 million,  or 215%, to $4.2 million for the six months ended March
31, 1999,  as compared to $1.3 million for the same period in 1998.  Our general
and administrative expenses increased $2.6 million, or 193%, to $3.9 million for
the six months  ended March 31,  1999,  as compared to $1.3 million for the same
period in 1998.  The growth in our general  and  administrative  expenses  are a
result of the hiring that the we have done to properly staff our administrative,
executive and finance  departments as we continue to grow. We believe that these
costs will  continue to increase as a result of the  continued  expansion of our
administrative staff and facilities to support growing operations.

In addition to the  general and  administrative  expenses of ISP Channel and our
corporate operations,  our consolidated general and administrative  expenses now
include the results of Intellicom,  which we acquired in February 1999.  General
and administrative  expenses for Intellicom from the date of acquisition through
March 31,  1999 were  $296,000.  We believe  that these  costs will  increase as
Intellicom begins to staff these functions to support growing operations.

Depreciation  and  Amortization.   Consolidated  depreciation  and  amortization
expenses  increased  $1.6  million,  or 457%, to $1.9 million for the six months
ended March 31,  1999,  as  compared  to  $346,000  for the same period in 1998.
Depreciation and amortization for ISP Channel and corporate  overhead  increased
$1.2 million,  or 336%, to $1.5 million for the six months ended March 31, 1999,
as  compared to  $346,000  for the same period in 1998 as a result of  increased
depreciation on expanded  property,  plant and equipment as well as amortization
of costs associated with ISP Channel's Cable Affiliates  Incentive  Program.  We
believe  that  these  expenses  will  increase  as we  continue  to  expand  our
facilities  and  continues to offer  additional  incentives to acquire new cable
affiliates.

In addition to the depreciation and amortization expenses of ISP Channel and our
corporate  operations,  our consolidated  depreciation and amortization expenses
now  include  the results of  Intellicom,  which we  acquired in February  1999.
Depreciation  and  amortization   expenses  for  Intellicom  from  the  date  of
acquisition  through March 31, 1999 were $418,000,  of which $383,000 represents
amortization  of  acquired  technology,  the  intangible  asset  created  by the
acquisition  of  Intellicom.  We believe that these  expenses  will  increase as
Intellicom  continues  to expand  its  facilities  and  amortize  the  remaining
acquired technology.

<PAGE>

Compensation  Expense Related to Stock Options and Warrants.  For the six months
ended March 31, 1999, we recognized a non-cash  compensation  expense related to
stock  options  issued to  non-employees  of $1.0  million.  Generally  accepted
accounting  principles  require that stock options  issued to  non-employees  be
"marked-to-market"  until such time as the options have been earned.  Therefore,
we expect this amount to either  increase or decrease based on the  fluctuations
in the trading price of our common stock.  In addition,  we expect this non-cash
expense to increase as we incurred an  approximate  $79.0 million charge related
to stock options issued to employees  under our 1998 Stock  Incentive Plan prior
to stockholder  approval of the plan. This  approximate  $79.0 million  non-cash
charge will be recognized into expense over the four-year vesting period of such
stock options.

Interest Expense.  Consolidated interest expense increased $695,000, or 161%, to
$1.1 million for the six months  ended March 31,  1999,  as compared to $432,000
for the same  period in 1998.  This was a result of  increased  lease  financing
associated with the capital  expansion needs of ISP Channel as well as increased
debt  at the  corporate  level,  including  the  $12.0  million  of  convertible
subordinated  loan notes issued in January 1999,  amortization  of deferred debt
issuance  costs  and  the  promissory   notes  issued  in  connection  with  the
acquisition of Intellicom in February 1999.

In addition to the interest expense of ISP Channel and our corporate operations,
our consolidated interest expense now includes the results of Intellicom,  which
we acquired in February 1999.  Interest  expense for Intellicom from the date of
acquisition  through March 31, 1999 was $31,000 due to Intellicom's prior credit
facilities, which have since been paid off in full.

Other Income.  Other income is primarily  comprised of interest income earned on
our cash and cash  equivalents and reflects  earnings on increased cash and cash
equivalent balances.

Income  Taxes.  We made no  provision  for income taxes for the six months ended
March 31, 1999, as a result of our net operating loss carry-forward.

Income (Loss) from Discontinued Operations. We recognized a net loss of $384,000
from operations of our discontinued  telecommunications  and document management
segments  for the six months  ended  March 31, 1999 as compared to a net loss of
$1.1  million for the same period in 1998.  This  consisted of a net loss in our
document management segment of $527,000 for the six months ended March 31, 1999,
as  compared  to $1.2  million for the same period in 1998 and net income in our
telecommunications  segment of $143,000 for the six months ended March 31, 1999,
as  compared to $115,000  for the same  period in 1998.  Our  telecommunications
segment,  KCI, sold substantially all of its assets in February 1999. Net income
from this discontinued operation is only through the date of disposition.

Net Loss. For the six months ended March 31, 1999, we had a net loss  applicable
to common shares of $14.5 million,  or a loss per share of $1.64,  compared to a
net loss of $3.7  million  for the same  period in 1998,  or a loss per share of
$0.52.

Liquidity and Capital Resources

Over the past year,  our growth has been funded through a combination of private
equity,  bank debt and lease  financings.  As of March 31, 1999, the Company had
approximately  $6.6 million of  unrestricted  cash.  However,  in April 1999, we
successfully  completed  both a $15.0 million  equity  placement with one of our
cable affiliates and a follow-on public offering which contributed an additional
$142.0  million  in net  proceeds.  We  believe,  as a result  of this,  that we
currently  have  sufficient  cash and financing  commitments to meet our funding
requirements for our current business plan over the next two years.  However, we
have  experienced  and continue to  experience  negative  operating  margins and
negative  cash flow  from  operations,  as well as an  ongoing  requirement  for
substantial additional capital investment.  We expect that we will need to raise
additional  capital to  accomplish  our business plan beyond the next two years.
Our future cash  requirements  for our business plan  expansion will depend on a
number of factors  including (i) the cost of attracting and signing up new cable
affiliates,  (ii) cable modem and associated costs of equipment,  (iii) the rate
at which  subscribers  purchase our Internet service offering and the pricing of
these  services,  (iv) the level of  marketing  required  to acquire  and retain
subscribers  and to attain a competitive  position in the  marketplace,  (v) the
rate at which we enter new markets and  introduce new services and (vi) the rate
<PAGE>

at which we invest in the upgrade of our  network.  In  addition,  we may in the
future  wish  to  selectively   pursue  possible   acquisitions  of  businesses,
technologies, content or products that complement our own in order to expand and
improve our Internet presence and achieve operating efficiencies.

We  recognize  that the cable and  Internet  segments  in which we  operate  are
rapidly  evolving  and  converging,  as  evidenced  by the high degree of recent
consolidation  within the cable industry and the many acquisitions and strategic
alliances  within both the cable and  Internet  sectors.  We believe that we can
become  a  significant  player  in this  process  and  that we have  unique  and
attractive  attributes that differentiate us from other companies.  However,  to
fully exploit future opportunities, we also recognize that our present financial
position,  though  sufficient for our current business plan, may be insufficient
to avail ourselves of these opportunities.

For the six months ended March 31, 1999, cash flows used in operating activities
of continuing operations were $10.2 million, as compared to $2.4 million for the
same  period in 1998.  Cash flows used in  investing  activities  of  continuing
operations  were $6.6  million  for the six  months  ended  March 31,  1999,  as
compared  to  $232,000  for the same  period in 1998.  Cash  flows  provided  by
financing  activities  of continuing  operations  were $11.0 million for the six
months  ended March 31,  1999,  as compared to cash flows  provided by financing
activities of continuing operations of $4.1 million for the same period in 1998.

During  February  1999,  a  single  holder  of our 9%  Convertible  Subordinated
Debentures  due  September  2000  converted  a  debenture  in the face amount of
$401,516  into 59,483 shares of our common  stock.  These 9%  debentures  have a
conversion  price of $6.75 per share.  In addition,  during  February  1999, the
Company  issued an aggregate of 782,352  shares of common stock  pursuant to the
conversion of the remaining 10,251.56 shares of the Company's outstanding Series
B redeemable  convertible  preferred stock. The Series B redeemable  convertible
preferred stock,  including accrued dividends,  was converted into common shares
at the conversion  price of $13.20 per share. As of March 31, 1999, there was no
Series B redeemable convertible preferred stock outstanding.

On March 26, 1999, we agreed to issue  660,000  shares of our common stock to an
investor for $15.0 million and a modification of the affiliate agreement between
us and a cable  affiliate  controlled by that  investor.  This  transaction  was
completed on April 12, 1999.

On  April  28,  1999,  we  received  $142.0  million  in net  proceeds  from the
underwritten  public  sale  of  4,600,000  shares  of  our  common  stock.  This
transaction  was lead managed by BT Alex.  Brown and  co-managed  by  BancBoston
Robertson  Stephens and CIBC World Markets.  Wit Capital  Corporation  served as
e-manager on this transaction.

Acquisition  of  Intellicom.  On February 9, 1999,  we completed the purchase of
Intellicom.  The  purchase  price was  comprised  of:  (i) a cash  component  of
$500,000,  less payment of certain expenses,  paid at closing; (ii) a promissory
note in the  amount  of  $1.0  million  due  one  year  after  closing;  (iii) a
promissory note in the amount of $2.0 million due two years after closing;  (iv)
the issuance of 500,000 shares of our common stock (adjustable upwards after one
year in certain  circumstances);  and (v) a demonstration  bonus of $1.0 million
payable  in cash or shares of our  common  stock at our  option  within one year
after closing if certain conditions are met.  Approximately $300,000 of the $1.0
million note is payable in cash or in our common stock at our option,  while the
balance of this note is payable in cash or in our common  stock at the option of
the holders. The entire amount of the $2.0 million note is payable in cash or in
our common stock at our option.

Sale of KCI. On February 12, 1999,  substantially  all of the assets of KCI were
sold  to  Convergent   Communications   for  an  aggregate   purchase  price  of
approximately  $6.3 million subject to adjustment in certain events.  Convergent
Communications  paid  $100,000 in cash in November  1998 upon  execution  of the
letter of intent to purchase and paid the remainder of the purchase price on the
closing date as follows:  (i) $1.4 million in cash;  (ii)  approximately  30,000
shares of Convergent  Communications' parent company common stock with an agreed
value of approximately  $300,000 (the "Convergent  Shares");  (iii) a promissory
note in the  amount of $2.0  million  which is payable on July 1, 1999 and bears
simple interest at the rate of eleven percent per annum; (iv)

<PAGE>

a  promissory  note in the amount of $1.0  million  which is payable on the date
that is 12 months  following  the closing date and bears simple  interest at the
rate of eight percent per annum;  and (v) a promissory note in an amount of $1.5
million  which is payable on the date which is 12 months  following  the closing
date,  bears  simple  interest  at the rate of eight  percent  per  annum and is
subject to mandatory prepayment in certain events. Furthermore, a purchase price
adjustment subsequent to closing provided the Company with additional Convergent
Shares with an agreed value of $198,000.  The cash  proceeds  received  from the
sale of KCI were  used to pay down  our  revolving  credit  facility  with  West
Suburban Bank.

Sale of MTC.  On  November 5, 1998,  we agreed to sell our  document  management
business,  MTC to Global Information  Distribution GmbH ("GID") for an aggregate
purchase  price  of  approximately   $5.1  million.   GID  paid  $100,000  as  a
non-refundable  deposit upon  acceptance of the GID term sheet.  GID will pay us
the  remaining  $5.0 million at the closing.  The cash proceeds from the sale of
MTC  will be used in part to repay  our  revolving  credit  facility  with  West
Suburban  Bank.  As of March 31,  1999  there  was  approximately  $2.2  million
outstanding under this facility. The balance of the proceeds will be used to pay
for transaction  costs  associated with the sale of MTC and to increase our cash
position.  We cannot  assure,  however,  that the sale of MTC will  close on the
terms described or at all.

Year 2000 Issues

Many  computer  programs  have been written using two digits rather than four to
define the  applicable  year.  This  poses a problem  at the end of the  century
because such computer  programs would not properly  recognize a year that begins
with "20" instead of "19".  This, in turn, could result in major system failures
or  miscalculations,  and is  generally  referred to as the "Year 2000 Issue" or
"Y2K  Issue".  We have  formulated  a Y2K Plan to address our Y2K issues and has
created a Y2K Task Force  headed by the  Director  of I/S and Data  Services  to
implement the plan. Our Y2K Plan has six phases:

1)           Organizational   Awareness   -  educate   our   employees,   senior
             management, and the board of directors about the Y2K issue.
2)           Inventory - complete  inventory  of internal  business  systems and
             their  relative  priority to  continuing  business  operations.  In
             addition,  this phase  includes a complete  inventory  of  critical
             vendors,  suppliers and services providers and their Y2K compliance
             status.
3)           Assessment - assessment of internal  business  systems and critical
             vendors,  suppliers and service  providers and their Y2K compliance
             status.
4)           Planning - preparing the individual project plans and project teams
             and other required internal and external resources to implement the
             required solutions for Y2K compliance.
5)           Execution - implementation of the solutions and fixes.
6)           Validation - testing the solutions for Y2K compliance.

Our Y2K Plan will apply to two areas:

o     internal business systems
o     compliance by external customers and providers

Internal  Business  Systems.  Our  internal  business  systems  and  workstation
business  applications  will be a primary  area of focus.  We are in the  unique
position  of  completing  the  implementation  of new  enterprise-wide  business
solutions to replace existing manual processes and/or "home grown"  applications
during 1999. These solutions are represented by their vendors as being fully Y2K
compliant.  We have  few,  if any,  "legacy"  applications  that will need to be
evaluated for Y2K compliance.

We have completed the Inventory, Assessment and Planning Phases of substantially
all critical internal business systems. The Execution and Validation Phases will
be completed by August 31, 1999.  We expect to be Y2K  compliant on all critical
systems, which rely on the calendar year before December 31, 1999.

Some  non-critical  systems  may not be  addressed  until  after  January  2000.
However,  we believe such systems will not cause significant  disruptions in our
operations.

<PAGE>

Compliance  by External  Customers and  Providers.  We are in the process of the
inventory and assessment phases of our critical suppliers, service providers and
contractors  to  determine  the  extent  to  which  our  interface  systems  are
susceptible to those third parties'  failure to remedy their own Y2K issues.  We
expect  that  assessment  will be  complete  by May  1999.  To the  extent  that
responses to Y2K readiness are  unsatisfactory,  we intend to change  suppliers,
service  providers or contractors to those that have demonstrated Y2K readiness;
but can not be assured that we will be  successful  in finding such  alternative
suppliers,  service  providers and  contractors.  We do not  currently  have any
formal  information  concerning  the status of our  customers  but have received
indications that most of our customers are working on Y2K compliance.

Risks  Associated  with Y2K. We believe the major risk  associated  with the Y2K
Issue is the ability of our key business  partners and vendors to resolve  their
own Y2K Issues. We will spend a great deal of time over the next several months,
working closely with suppliers and vendors, to assure their compliance.

Should a  situation  occur  where a key  partner  or vendor is unable to resolve
their Y2K issue,  we will be in a position to change to Y2K  compliant  partners
and vendors.

Cost to Address Y2K Issues. Since we are in the unique position implementing new
enterprise wide business  solutions to replace  existing manual processes and/or
"home grown"  applications.,  there will be little, if any, Y2K changes required
to  existing  business  applications.  All  of  the  new  business  applications
implemented (or in the process of being  implemented in 1999) are represented as
being Y2K compliant.

We  currently  believe that  implementing  our Y2K Plan will not have a material
effect on our financial position.

Contingency  Plan. We have not  formulated a  contingency  plan at this time but
expect to have specific contingency plans in place prior to September 30, 1999.

Summary.  We  anticipate  that the Y2K Issue  will not have a  material  adverse
effect on our  financial  position  or  results of  operations.  There can be no
assurance,  however, that the systems of other companies or government entities,
on which we rely for  supplies,  cash  payments,  and future  business,  will be
timely converted,  or that a failure to convert by another company or government
entities,  would not have a material adverse effect on our financial position or
results of operations.  If third party service providers and vendors, due to Y2K
Issues,  fail to provide us with  components,  materials,  or services which are
necessary  to deliver  our  services  and  product  offerings,  with  sufficient
electrical power and  transportation  infrastructure to deliver our services and
product offerings, then any such failure could have a material adverse effect on
our ability to conduct business,  as well as our financial  position and results
of operations.

Item 3.   Quantitative and Qualitative Disclosures about Market Risk.

Interest Rate Risk

Our exposure to market risk for changes in interest  rates relates  primarily to
the  increase or  decrease  in the amount of interest  income we can earn on our
investment  portfolio  and on the increase or decrease in the amount of interest
expense we must pay with respect to our various  outstanding  debt  instruments.
The risk associated with fluctuating  interest expense is limited,  however,  to
the exposure related to those debt  instruments and credit  facilities which are
tied to market rates.  We do not use  derivative  financial  instruments  in our
investment  portfolio.  We ensure the safety and  preservation  of our  invested
principal funds by limiting default risks, market risk and reinvestment risk. We
mitigate default risk by investing in safe and high-credit quality securities.

PART II. OTHER INFORMATION

Item 2.  Changes in Securities.

On April 13, 1999, our stockholders  approved our reincorporation  from New York
to Delaware and  increased  our  authorized  number of shares of common stock to
100,000,000   from   25,000,000.   On  April  14,  1999,  we   effectuated   the
reincorporation  by completing the merger of SoftNet  Systems,  Inc., a New York
corporation, into its wholly-owned subsidiary, SoftNet Systems, Inc., a Delaware
corporation. A discussion of the differences of the rights of stockholders under
Delaware  and New York law and the  effect  of the  increase  in our  authorized
shares of common stock is contained in proposals  two and six of our  Definitive
Proxy Statement on Form 14A for our 1999 annual meeting of  stockholders,  which
are hereby incorporated by reference herein.

<PAGE>

On January 12, 1999,  we issued  $12,000,000  principal  amount of our 9% senior
subordinated  convertible notes due 2001 and warrants to purchase 300,000 shares
of common stock to two investors for aggregate proceeds of $12,000,000. Prior to
July 1, 1999, the  conversion  price of the 9% senior  subordinated  convertible
notes due 2001 is equal to $17.00 per share. Thereafter, the conversion price of
the 9% senior  subordinated  convertible notes due 2001 is equal to the lower of
$17.00 and the  average of any five  closing  bid prices in the 30 trading  days
prior to conversion. The warrants have an exercise price of $17.00 and expire on
January 1, 2003. These securities were issued in a nonpublic  offering  pursuant
to Regulation D under the Securities Act.

On February 5, 1999,  we issued  59,483  shares of common  stock to one investor
upon  the  conversion  of  $401,516  principal  amount  of  our  9%  convertible
debentures  due 2000.  These  debentures  have a  conversion  price of $6.75 per
share.  These  securities  were issued  pursuant to an exemption  under  Section
3(a)(9) of the Securities Act.

On February 9, 1999,  we issued an aggregate  500,000  shares of common stock to
the former  shareholders  of Intelligent  Communications  in connection with our
acquisition of Intelligent Communications as part of the purchase consideration.
The shares were valued at $14.9375 per share, which was the closing price of the
common stock on February 9, 1999.  These  securities  were issued in a nonpublic
offering pursuant to Section 4(2) of the Securities Act.

On March 1, 1999, we issued 65,843 shares of common stock to Inktomi Corporation
in connection with purchasing a license from Inktomi to certain technology.  The
shares were valued at $1,000,000.  These  securities  were issued in a nonpublic
offering pursuant to Section 4(2) of the Securities Act.

On March 22, 1999, we issued  warrants to purchase  3,013 shares of common stock
to an institutional lender in connection with a loan facility. The warrants have
an exercise price of $29.875 and expire on March 22, 2003. These securities were
issued in a nonpublic offering pursuant to Section 4(2) of the Securities Act.

On March 26, 1999, we agreed to issue  660,000  shares of our common stock to an
investor for $15,000,000 and a modification of the affiliate  agreement  between
us and a cable affiliate that the investor  controls.  We issued these shares on
April 12, 1999. These securities were issued in a nonpublic offering pursuant to
Regulation D under the Securities Act.



<PAGE>



Item 4.  Submission of Matters to a Vote of Security Holders.

We held our annual meeting of  stockholder's  on April 13, 1999. At such meeting
the following actions were voted upon:
<TABLE>
<CAPTION>

                                  Affirmative Votes    Negative Votes    Votes Withheld     Broker's Non-Votes

<S>                                    <C>                <C>                 <C>                 <C>
(1) Election of Directors:
    Ronald I. Simon.............       8,221,939             ---              314,285                ---

    Dr. Lawrence B. Brilliant...       8,227,339             ---              308,885                ---

    Ian B. Aaron................       8,226,639             ---              309,585                ---

    Edward A. Bennett...........       8,227,439             ---              308,785                ---

    Sean P. Doherty.............       8,227,139             ---              309,085                ---

    Robert C. Harris, Jr........       8,222,664             ---              313,560                ---

(2) Increase Authorized Shares..
                                       8,156,021           339,491             40,712                ---

(3) Approve 1998 Stock
    Incentive Plan..............       5,960,199           386,356             41,619             2,148,050

(4) Approve Issuance of Common
    Stock Underlying Preferred
    Stock.......................
                                       6,131,311            69,897            186,966             2,148,050

(5) Approve the Sale of
    Non-Internet Related
    Subsidiary..................       6,295,550            56,252             36,372             2,148,050

(6) Approve Reincorporation in
    Delaware....................       6,335,212            13,983             38,979             2,148,050

(7) Appoint
    PricewaterhouseCoopers,
    Independent Auditors........       8,474,297            19,030             42,897                ---
</TABLE>

<PAGE>



Item 5. Other Information

FACTORS AFFECTING THE COMPANY'S OPERATING RESULTS

The risks and uncertainties  described below are not the only ones that we face.
Additional  risks  and  uncertainties  not  presently  known  to us or  that  we
currently deem immaterial may also impair our business operations. If any of the
following risks actually occur, our business,  financial condition or results of
operations  could be materially  adversely  affected.  In such case, the trading
price of our common stock could decline.

We cannot  assure you that we will be  profitable  because we have  operated our
Internet services business only for a short period of time

We are in the process of selling our non-Internet  related subsidiaries to focus
on substantial expansion of our Internet subsidiary, ISP Channel, Inc. We cannot
assure  you that our  ability to develop or  maintain  strategies  and  business
operations  for the ISP Channel  services  will achieve  positive  cash flow and
profitability. We acquired ISP Channel, Inc. in June 1996. As such, we have very
limited operating history and experience in the Internet services business.  The
successful  expansion of the ISP Channel  services will require  strategies  and
business operations that differ from those we have historically  employed. To be
successful,  we must develop and market  products  and services  that are widely
accepted by consumers and businesses at prices that provide cash flow sufficient
to meet our debt service, capital expenditures and working capital requirements.

Our  business  may fail if the  industry  as a whole fails or our  products  and
services do not gain commercial acceptance

It has become feasible to offer Internet  services over existing cable lines and
equipment  on a  broad  scale  only  recently.  There  is no  proven  commercial
acceptance of cable-based  Internet services and none of the companies  offering
such  services  are  currently  profitable.  It is currently  very  difficult to
predict whether  providing  cable-modem  Internet  services will become a viable
industry.

The success of the ISP Channel  service will depend upon the  willingness of new
and existing cable  subscribers to pay the monthly fees and  installation  costs
associated with the service and to purchase or lease the equipment  necessary to
access the Internet.  Accordingly,  we cannot predict  whether our pricing model
will prove to be viable, whether demand for our services will materialize at the
prices we expect to charge,  or whether current or future pricing levels will be
sustainable.  If we do not  achieve or  sustain  such  pricing  levels or if our
services do not achieve or sustain broad market  acceptance,  then our business,
financial condition, and prospects will be materially adversely affected.

Our continued negative cash flow and net losses may depress stock prices

Our continued  negative cash flow and net losses may result in depressed  market
prices  for our common  stock.  We cannot  assure you that we will ever  achieve
favorable  operating  results or  profitability.  We have sustained  substantial
losses over the last five fiscal years.  For the fiscal year ended September 30,
1998,  we had a net loss of $17.3 million and for the six months ended March 31,
1999,  we had a net  loss of $14.5  million.  As of March  31,  1999,  we had an
accumulated  shareholders'  deficit of approximately $10.9 million. We expect to
incur  substantial  additional losses and experience  substantial  negative cash
flows as we expand the ISP Channel service.
The costs of expansion will include expenses incurred in connection with:

      o     inducing  cable  affiliates  to  enter  into  exclusive   multi-year
            contracts with us;

      o     installing the equipment necessary to enable our cable affiliates to
            offer our services;

      o     research and development of new product and service offerings;

      o     the  continued  development  of our direct and indirect  selling and
            marketing efforts; and

      o     possible  charges related to  acquisitions,  divestitures,  business
            alliances or changing  technologies,  including the  acquisition  of
            Intelligent Communications, Inc.

If we do not achieve cash flows sufficient to support our operations,  we may be
unable to implement our business plan

The development of our business will require  substantial capital infusions as a
result of:

      o     our need to enhance  and expand  product and  service  offerings  to
            maintain our competitive position and increase market share; and

      o     the  substantial  investment in equipment  and  corporate  resources
            required  by the  continued  national  launching  of the ISP Channel
            service.

In addition,  we anticipate  that the majority of cable  affiliates with one-way
cable  systems will  eventually  upgrade their cable  infrastructure  to two-way
cable  systems,  at which  time we will have to  upgrade  our  equipment  on any
affected  cable system to handle  two-way  transmissions.  We cannot  accurately
predict whether or when we will ultimately  achieve cash flow levels  sufficient
to support  our  operations,  development  of new  products  and  services,  and
expansion of the ISP Channel service.  Unless we reach such cash flow levels, we
will require  additional  financing to provide  funding for  operations.  In the
event we complete a long-term debt  financing,  we will be highly  leveraged and
such debt  securities  will have  rights  or  privileges  senior to those of our
current  stockholders.  In the event that equity  securities are issued to raise
additional  capital,  the  percentage  ownership  of our  stockholders  will  be
reduced, stockholders may experience additional dilution and such securities may
have rights,  preferences and privileges senior to those of our common stock. In
the event that we cannot generate  sufficient cash flow from operations,  or are
unable to borrow or otherwise  obtain  additional  funds on  favorable  terms to
finance operations when needed, our business, financial condition, and prospects
would be materially adversely affected.

The unpredictability of our quarter-to-quarter  results may adversely affect the
trading price of our common stock

We   cannot   predict   with   any   significant   degree   of   certainty   our
quarter-to-quarter   operating   results.   As  a  result,   we   believe   that
period-to-period  comparisons  of our revenues and results of operations are not
necessarily meaningful and you should not rely upon them as indicators of future
performance.  It is likely that in one or more future  quarters  our results may
fall below the  expectations  of analysts  and  investors.  In such  event,  the
trading  price of our common  stock would likely  decrease.  Many of the factors
that cause our  quarter-to-quarter  operating  results to be  unpredictable  are
largely beyond our control.

These factors include, among others:

      o     the number of subscribers who retain our Internet services;

      o     our ability and that of our cable  affiliates to  coordinate  timely
            and effective marketing strategies, in particular,  our strategy for
            marketing the ISP Channel service to subscribers in such affiliates'
            local cable areas;

      o     the  rate  at  which  our  cable   affiliates   can   complete   the
            installations required to initiate service for new subscribers;

      o     the  amount  and  timing of  capital  expenditures  and other  costs
            relating to the expansion of the ISP Channel service;

      o     competition in the Internet or cable industries; and

      o     changes in law and regulation.

We will record an expense  related to our issuance of stock options  pursuant to
our 1998 Stock  Incentive Plan that may have a negative  impact on our financial
condition

Between  October 1998 and March 1999,  we granted  stock  options under our 1998
Stock  Incentive  Plan.  Because the 1998 Stock  Incentive  Plan was not adopted
until our annual meeting of stockholders  held in April 1999, we are required to
recognize a compensation expense equal to the excess of the fair market price on
the date of stockholder approval over the exercise price of the committed option
grants.  The  compensation  expense is  approximately  $79.0 million and will be
recognized  over the  vesting  period of the  options.  The  expense  may have a
negative impact on our financial condition.

Existing contractual  obligations allow for additional issuances of common stock
upon a market price  decline,  which could further  adversely  affect the market
price for our common stock

The total number of shares of our common stock underlying all of our convertible
securities,  assuming  the maximum  amounts  that we could be obligated to issue
without our consent,  including common stock  underlying  unvested stock options
and grants made under our 1998 Stock Incentive  Plan, is 7,634,348,  which would
have been 42.3% of our  outstanding  common stock as of March 31, 1999  assuming
such shares would have been issued as of such date. The issuance of common stock
as a result of these  obligations  could  result in  immediate  and  substantial
dilution to the holders of our common  stock.  We are  obligated  to issue up to
4,216,761 shares of our common stock on the exercise of warrants and options and
the conversion of certain of our  convertible  debt. Our preferred  stock and 9%
senior subordinated  convertible notes due 2001 could convert into an additional
3,417,587  shares of common stock without our consent.  However,  we do not know
the  exact  number  of  shares  of our  common  stock  that we will  issue  upon
conversion of these securities because they potentially have floating conversion
prices  based on the average  market  prices of the common stock for a number of
trading days immediately prior to conversion.

The floating  conversion  price  feature of the Series C Preferred  Stock and 9%
senior  subordinated  convertible  notes due 2001 begin May 31, 1999 and July 1,
1999, respectively. Generally, decreases in the market price of the common stock
below their  initial  conversion  prices  would  result in more shares of common
stock being issued upon their conversion.

The  following  table sets forth the number of shares of common  stock  issuable
upon  conversion  of  the   outstanding   preferred  stock  and  our  9%  senior
subordinated  convertible notes due 2001 and percentage ownership (as determined
in accordance with the rules of the SEC) that each represents assuming:

      o     the market  price of the common  stock is 25%,  50%, 75% and 100% of
            the market price of the common  stock on March 31,  1999,  which was
            $36.63 per share;

      o     the floating  conversion price feature of the preferred stock and 9%
            senior subordinated convertible notes due 2001 was in effect;

      o     the  maximum  conversion  prices  of the  preferred  stock  was  not
            adjusted as provided in our certificate of incorporation;

      o     the  conversion  price was equal to the market  price at the time of
            conversion  in the event the market  price was less than the maximum
            conversion price; and

      o     the 1,717,587 share limit with respect to the 9% senior subordinated
            convertible  notes was not in effect.  See "Risks associated with 9%
            senior subordinated convertible note financing."

On March 31, 1999, there were 10,417,866 shares of common stock, 7,625.39 shares
of Series C Preferred Stock and $12,000,000 principal amount under the 9% senior
subordinated convertible notes due 2001 outstanding. In the event that more than
2,000,000 shares of common stock would be required to fully convert the Series C
Preferred  Stock,  we must either honor  conversion  requests over the 2,000,000
share limit or redeem the  remaining  Series C Preferred  Stock for cash, at its
stated value of $1,000 per share plus accrued but unpaid dividends.



<PAGE>



                                             9% Senior 
                        Series C            Subordinated  
                    Preferred Stock      Convertible Notes       Total
                   ------------------   ------------------  ----------------
 Percentage of       Shares               Shares              Shares     
 Market Price      Underlying     %     Underlying     %    Underlying     %
 ------------      ----------     -     ----------     -    ----------     -

 25%  ($9.16)       847,266      7.5     1,310,044   11.2    2,157,310   17.2
 50% ($18.32)       847,266      7.5      705,882     6.4    1,553,148   13.0
 75% ($24.47)       847,266      7.5      705,882     6.4    1,553,148   13.0
100% ($36.63)       847,266      7.5      705,882     6.4    1,553,148   13.0

Dilution may result in a decrease in the market price of our common stock

To the extent any of these shares of common  stock are issued,  the market price
of our common stock may decrease because of the additional shares on the market.
If the actual price of the common stock decreases,  the holders of our preferred
stock and 9% senior  subordinated  convertible  notes could convert into greater
amounts of common  stock,  the sales of which  could  further  depress the stock
price. In addition, any significant downward pressure on the market price of the
common  stock  that may be caused by the  holders of the  preferred  stock or 9%
senior subordinated convertible notes converting and selling material amounts of
common stock could encourage  short sales by such holders or others.  Such short
sales could place  further  downward  pressure on the price of our common stock.
There are several  factors that  influence the market price of our common stock.
See " - Our stock price is volatile."

The ownership  limitations in our certificate of  incorporation  may not protect
against dilution

Our  certificate of  incorporation  and the terms of our 9% senior  subordinated
convertible  notes due 2001 do not allow us to issue  shares of our common stock
to holders of our preferred stock or 9% senior  subordinated  convertible notes,
respectively,  if such issuance would result in such holders beneficially owning
more than 4.99% of our outstanding common stock. The 4.99% ownership  limitation
does not prevent the holders from  converting into common stock and then selling
such common stock to stay below the limitation.

Risks associated with 9% senior subordinated convertible note financing

The  agreements  with the purchasers of the 9% senior  subordinated  convertible
notes and warrants  contain terms and covenants that could result in substantial
dilution to our  stockholders.  The financing could also make future  financings
and loans and merger and acquisition activities more difficult and could require
us to expend  substantial  amounts of cash in order to satisfy  our  obligations
under the financing agreements.

Restrictions on Mergers and Consolidations

Certain  provisions  could  discourage  some  potential  purchasers by making an
acquisition  of our  Company  or an asset  sale more  difficult  and  expensive,
including:

      o     participation   by  the  holders  of  the  9%  senior   subordinated
            convertible  notes due 2001 with the holders of the common  stock in
            the proceeds of a merger or  consolidation  with a public company as
            if the 9% senior subordinated  convertible notes due 2001 were fully
            converted into common stock on the trading day immediately preceding
            the public announcement of such merger or consolidation;

      o     similar  participation by the holders of the related warrants in the
            event  our  merger  or  consolidation  with  another  company  would
            constitute a dilutive event under the terms of the warrants; and

      o     prohibition against selling or transferring all or substantially all
            of our assets without prior approval of the holders of the 9% senior
            subordinated convertible notes due 2001.
<PAGE>

Certain covenants made and default  provisions agreed to, in connection with the
issuance  of the 9%  senior  subordinated  convertible  notes  may also have the
effect of limiting our ability to obtain  additional  financing  and issue other
securities. We have also agreed, until July 1, 1999, to grant the holders of the
9% senior  subordinated  convertible notes a right of first refusal with respect
to certain issuances of common stock or securities convertible,  exchangeable or
exercisable  for common stock.  In addition,  we are  prohibited  from obtaining
additional  senior  indebtedness for borrowed money in excess of an aggregate of
$12.0 million unless such indebtedness  expressly provides that it is not senior
or superior to the 9% senior subordinated convertible notes.

Conversion  of the 9% senior  subordinated  convertible  notes  would  result in
dilution to the holders of our common stock

After  six  months  from  the  date  of  issuance,  the 9%  senior  subordinated
convertible  notes are  convertible  into shares of our common stock at variable
rates based on future  trading prices of our common stock and on events that may
occur in the future. The number of shares of common stock that may ultimately be
issued upon conversion is therefore presently indeterminable and could fluctuate
significantly  based on the  issuance by us of other  securities.  The 9% senior
subordinated  convertible  notes and related  warrants  also have  anti-dilution
protection  and  may  require  the  issuance  of  more  shares  than  originally
anticipated.  These  factors may result in  substantial  future  dilution to the
holders of our common stock.

Certain  provisions  of the 9% senior  subordinated  convertible  notes may have
negative accounting consequences

In  addition  to the  foregoing,  the  cross  default  provisions  to  our  debt
instruments  and other terms of the 9% senior  subordinated  convertible  notes,
under certain  circumstances,  could lead to a significant  accounting charge to
earnings  and  could  materially  adversely  affect  our  business,  results  of
operations  and  condition.  Such a charge and  potential  other future  charges
relating  to the  provisions  of the 9% senior  subordinated  convertible  notes
financing agreements may negatively impact our earnings (loss) per share and the
market  price of our common  stock both  currently  and in future  periods.  The
convertibility  features of such 9% senior  subordinated  convertible  notes and
subsequent  sales of the common stock  underlying both it and the warrants could
materially  adversely  affect our valuation and the market  trading price of our
shares of common stock.

We may be  required  to make  cash  payments  to the  holders  of the 9%  senior
subordinated convertible notes

In addition, the terms of the 9% senior subordinated  convertible notes prohibit
their holders from converting such notes into more than 1,717,587  shares of our
common  stock.  In the event that we cannot honor  conversions  of the 9% senior
subordinated  convertible  notes  because  they would  result in greater than an
aggregate  of   1,717,587   shares  of  common  stock  being  issued  upon  such
conversions,  then we must convert such  outstanding  principal amount up to the
1,717,587 limit and prepay the remaining outstanding principal amount.

We may be required to prepay the 9% senior subordinated convertible notes if:

              o      the holders of the 9% senior subordinated convertible notes
                     have  already  converted  into  1,717,587  shares of common
                     stock  and  there   remains   a  balance   of  such   notes
                     unconverted; or

              o      the holders of the 9% senior subordinated convertible notes
                     cannot otherwise  convert or resell the common stock issued
                     upon conversion.


Such cash payments would adversely affect our financial condition and ability to
implement  the  business  plan for ISP Channel,  Inc. In  addition,  we would be
required to raise  funds  elsewhere,  and we cannot  assure you that we would be
able to obtain adequate sources of additional capital.

We would not reach the  1,717,587  share limit  unless the  floating  conversion
price feature were in effect and the market price of the common stock fell below
$6.99.  In addition,  if the holders of the 9% senior  subordinated  convertible
notes cannot  convert or resell the common stock  issued upon  conversion  other
than because the  1,717,587  share limit is reached,  the terms of the 9% senior
subordinated  convertible  notes,  in  addition  to other  remedies,  permit the
holders to require us to make cash  payments.  The  maximum  amount of such cash
payments,  assuming the market  price and the  conversion  price were equal,  is
$13,440,000,  without taking into account any interest that would accrue. If the
market price and the conversion price are not equal,  then the maximum amount of
such cash payments could be significantly higher.
<PAGE>

We  may  not  be  able  to  successfully  implement  our  business  plan  if our
relationship with our cable affiliates is negatively impacted

The  success  of our  business  depends  upon our  relationship  with our  cable
affiliates.   Therefore,   our  success  and  future  business  growth  will  be
substantially  affected  by  economic  and  other  factors  affecting  our cable
affiliates.

We do not have direct contact with our subscribers

Because  subscribers to the ISP Channel  service must subscribe  through a cable
affiliate,  the cable  affiliate  (and not us) will  substantially  control  the
customer  relationship  with the  subscriber.  For  example,  under  many of our
existing  contracts,  cable affiliates are responsible for important  functions,
such as billing for and collecting ISP Channel  subscription  fees and providing
the labor and costs associated with distribution of local marketing materials.

Failure or delay by cable  operators  to upgrade  their  systems  may  adversely
affect subscription levels

Certain ISP Channel  services are dependent on the quality of the cable networks
of our cable affiliates.  Currently, most cable systems are capable of providing
only information  from the Internet to the subscribers,  and require a telephone
line to carry information from the subscriber to the Internet. These systems are
called "one-way" cable systems. Several cable operators have announced and begun
making  upgrades to their systems to increase the capacity of their networks and
to enable traffic both to and from the Internet over their  networks,  so-called
"two-way  capability."  However,  cable system operators have limited experience
with  implementing  such upgrades.  These  investments have placed a significant
strain on the financial,  managerial,  operational  and other resources of cable
system operators, many of which already maintain a significant amount of debt.

Further,  cable operators must  periodically  renew their  franchises with city,
county or state governments.  These governmental bodies may impose technical and
managerial  conditions  before  granting a  renewal,  and these  conditions  may
adversely affect the cable operator's ability to implement such upgrades.

In  addition,   many  cable  operators  may  emphasize   increasing   television
programming  capacity  to compete  with other  forms of  entertainment  delivery
systems, such as direct broadcast satellite, instead of upgrading their networks
for two-way  Internet  capability.  Such upgrades have been,  and we expect will
continue  to be,  subject to change,  delay or  cancellation.  Cable  operators'
failure to complete these upgrades in a timely and  satisfactory  manner,  or at
all, would adversely affect the market for our products and services in any such
operators'  franchise area. In addition,  cable operators may roll-out  Internet
access  systems  that are  incompatible  with  our  high-speed  Internet  access
services.  Any of these  actions  could  have a material  adverse  effect on our
business, financial condition, and prospects.

The  unavailability  of two-way  capability  in certain  markets may  negatively
affect subscription levels

We provide  Internet  services to both one-way and two-way  cable  systems.  For
one-way cable systems,  subscribers receive Internet services over cable systems
and transmit data to the Internet  using a telephone  line return path. In those
circumstances,  our services may not provide the high speed  access,  quality of
experience and  availability  of certain  applications  necessary to attract and
retain subscribers to the ISP Channel service.  Subscribers using a conventional
telephone line return path will experience  upstream data transmission speeds to
the Internet that are provided by their analog modems which is typically 56 kbps
or less. It is not clear what impact the lack of two-way capability will have on
subscription levels for the ISP Channel service.

If we do not obtain exclusive access to cable subscribers, we may not be able to
sustain any meaningful growth

The success of the ISP Channel service is dependent,  in part, on our ability to
gain exclusive access to cable  consumers.  Our ability to gain exclusive access
to cable customers depends upon our ability to develop  exclusive  relationships
with cable  operators  that are dominant  within their  geographic  markets.  We
cannot assure you that affiliated  cable operators will not face  competition in
the  future  or  that  we will be  able  to  establish  and  maintain  exclusive
relationships with cable affiliates.  Currently,  a number of our contracts with
cable operators do not contain  exclusivity  provisions.  Even if we are able to
establish and maintain exclusive  relationships with cable operators,  we cannot
assure the ability to do so on favorable terms or in sufficient quantities to be
profitable.  In addition, we will be excluded from providing Internet over cable
in those areas served by cable operators with exclusive  arrangements with other
Internet service providers.  Our contracts with cable affiliates typically range
from three to seven years,  and we cannot assure you that such contracts will be

<PAGE>

renewed on satisfactory terms. If the exclusive  relationship  between either us
and our cable  affiliates  or  between  our  cable  affiliates  and their  cable
subscribers is impaired, if we do not become affiliated with a sufficient number
of cable operators,  or if we are not able to continue our  relationship  with a
cable affiliate once the initial term of its contract has expired, our business,
financial condition and prospects could be materially adversely affected.

Failure to increase revenues from new products and services, whether due to lack
of market acceptance, competition, technological change or otherwise, would have
a material adverse effect on our business, financial condition and prospects

We expect to continue  extensive  research  and  development  activities  and to
evaluate new product and service  opportunities.  These  activities will require
our continued  investment in research and  development  and sales and marketing,
which could adversely  affect our short-term  results of operations.  We believe
that future revenue growth and profitability  will depend in part on our ability
to  develop  and  successfully  market new  products  and  services.  Failure to
increase revenues from new products and services,  whether due to lack of market
acceptance,  competition,  technological  change  or  otherwise,  would  have  a
material adverse effect on our business financial condition and prospects.

If we fail to manage our expanding business effectively, our business, financial
condition and prospects could be adversely affected

To exploit  fully the market for our  products  and  services,  we must  rapidly
execute our sales strategy while managing  anticipated growth through the use of
effective planning and operating  procedures.  To manage our anticipated growth,
we must, among other things:

      o     continue  to develop  and improve  our  operational,  financial  and
            management information systems;

      o     hire and train additional qualified personnel;

      o     continue to expand and upgrade core technologies; and

      o     effectively  manage multiple  relationships  with various customers,
            suppliers and other third parties.

Consequently,  such expansion  could place a significant  strain on our services
and support operations,  sales and administrative personnel and other resources.
We may, in the  future,  also  experience  difficulties  meeting  demand for our
products and services.  Additionally,  if we are unable to provide  training and
support  for our  products,  it will take  longer to install  our  products  and
customer  satisfaction  may  be  lower.  We  cannot  assure  that  our  systems,
procedures  or  controls  will be adequate  to support  our  operations  or that
management  will be able to  exploit  fully  the  market  for our  products  and
services. Our failure to manage growth effectively could have a material adverse
effect on our business, financial condition and prospects.

If cable  affiliates  are unable to renew their  franchises  or we are unable to
affiliate with  replacement  operators,  our business,  financial  condition and
prospects could be materially adversely affected

Cable television  companies operate under  non-exclusive  franchises  granted by
local or state  authorities that are subject to renewal and  renegotiation  from
time to time.  A franchise  is  generally  granted for a fixed term ranging from
five to 15 years,  but in many  cases the  franchise  may be  terminated  if the
franchisee  fails to comply with the material  provisions of the franchise.  The
Cable  Television  Consumer  Protection  and  Competition  Act of 1992 prohibits
franchising  authorities from granting exclusive cable television franchises and
from unreasonably refusing to award additional competitive franchises.  This Act
also permits municipal  authorities to operate cable television systems in their
communities without franchises. We cannot assure that cable television companies
having contracts with us will retain or renew their  franchises.  Non-renewal or
termination  of any such  franchises  would  result  in the  termination  of our
contract with the applicable  cable  operator.  If an affiliated  cable operator
were to lose its franchise, we would seek to affiliate with the successor to the
franchisee.  We cannot,  however,  assure an affiliation with such successor. In
addition,  affiliation  with a successor could result in additional costs to us.
If we cannot affiliate with replacement cable operators, our business, financial
condition and prospects could be materially adversely affected.

<PAGE>


We may lose  cable  affiliates  through  their  acquisition  which  could have a
material adverse effect on our business, financial condition and prospects

Under many of our contracts,  if a cable affiliate is acquired and the acquiring
company chooses not to enter into a contract with us, we may lose our ability to
offer  Internet  services  in the area  served by such  former  cable  affiliate
entirely or on an  exclusive  basis.  Such a loss could have a material  adverse
effect on our business, financial condition and prospects.

We depend on third-party  technology to develop and introduce  technology we use
and the absence of or any  significant  delay in the  replacement of third-party
technology  would  have a material  adverse  effect on our  business,  financial
condition  and  prospects  The markets for the  products and services we use are
characterized by the following:

              o       intense competition;

              o       rapid technological advances;

              o       evolving industry standards;

              o       changes in subscriber requirements;

              o       frequent new product introductions and enhancements; and

              o       alternative service offerings.

Because of these  factors,  we have chosen to rely upon third parties to develop
and  introduce  technologies  that  enhance  our  current  product  and  service
offerings.   If  our  relationship  with  such  third  parties  is  impaired  or
terminated,  then we would have to find other  developers  on a timely  basis or
develop our own technology.  We cannot predict whether we will be able to obtain
the third-party  technology necessary for continued development and introduction
of new and  enhanced  products and  services.  In  addition,  we cannot  predict
whether we will obtain third-party  technology on commercially  reasonable terms
or  replace  third-party   technology  in  the  event  such  technology  becomes
unavailable,  obsolete or  incompatible  with future versions of our products or
services.  The absence of or any significant  delay in the replacement of third-
party technology would have a material adverse effect on our business, financial
condition and prospects.

We depend on third-party suppliers for certain key products and services and any
inability to obtain sufficient key components or to develop  alternative sources
for such  components  could  result  in  delays  or  reductions  in our  product
shipments

We currently  depend on a limited  number of suppliers  for certain key products
and services.  In  particular,  we depend on Excite,  Inc. for national  content
aggregation,  3Com  Corporation  and Com21,  Inc.  for  headend  and cable modem
equipment,  Cisco  Systems,  Inc. for  specific  network  routing and  switching
equipment, and, among others,  MCIWorldCom,  Inc. for national Internet backbone
services.  Excite  recently  announced  that it is being  acquired by one of our
primary  competitors,  @Home.  If,  due to  this  acquisition,  Excite  were  to
terminate  its contract with us prior to the  contract's  expiration in November
1999,  or not to extend the  contract at that time,  we would need to find a new
provider of national  content  aggregation.  Additionally,  certain of our cable
modem and headend equipment  suppliers are in litigation over their patents.  We
could  experience  disruptions  in the  delivery or  increases  in the prices of
products and services  purchased  from vendors as a result of this  intellectual
property  litigation.  We cannot  predict  when  delays in the  delivery  of key
components  and other  products  may occur due to shortages  resulting  from the
limited  number  of  suppliers,  the  financial  or other  difficulties  of such
suppliers or the possible limited availability in the suppliers'  underlying raw
materials.  In addition,  we may not have adequate  remedies  against such third
parties as a result of breaches of their  agreements  with us. The  inability to
obtain  sufficient  key  components or to develop  alternative  sources for such
components  could result in delays or  reductions in our product  shipments.  If
that were to happen,  it could have a material  adverse  effect on our  customer
relationships, business, financial condition, and prospects.

<PAGE>



We depend on  third-party  carriers to maintain  their cable systems which carry
our data and any  interruption  of our operations due to the failure to maintain
their  cable  systems  would have a  material  adverse  effect on our  business,
financial condition and prospects

Our success  will  depend upon the  capacity,  reliability  and  security of the
network  used  to  carry  data  between  our  subscribers  and the  Internet.  A
significant  portion of such network is owned by third parties,  and accordingly
we have no control over its quality and maintenance.  We rely on cable operators
to maintain their cable systems. In addition,  we rely on other third parties to
provide a connection from the cable system to the Internet.  Currently,  we have
transit agreements with MCIWorldCom,  Sprint, and others to support the exchange
of traffic between our network operations center, cable system and the Internet.
The failure of any other link in the delivery chain resulting in an interruption
of our  operations  would  have  a  material  adverse  effect  on our  business,
financial condition and prospects.

Any increase in competition  could reduce our gross margins,  require  increased
spending  by us on  research  and  development  and  sales  and  marketing,  and
otherwise  materially  adversely  affect our business,  financial  condition and
prospects

The markets for our  products and services  are  intensely  competitive,  and we
expect  competition  to  increase  in the future.  Many of our  competitors  and
potential  competitors  have  substantially  greater  financial,  technical  and
marketing  resources,  larger  subscriber  bases,  longer  operating  histories,
greater name recognition and more established relationships with advertisers and
content and  application  providers than we do. Such  competitors may be able to
undertake more extensive  marketing  campaigns,  adopt more  aggressive  pricing
policies and devote substantially more resources to developing Internet services
or online content than we can. Our ability to compete may be further impeded if,
as evidenced by the recent  merger  between AT&T and TCI and the pending  merger
between  AT&T  and  MediaOne,   competitors  utilizing  different  or  the  same
technologies  seek to merge to enhance their  competitive  strengths.  We cannot
predict  whether  we will be able to  compete  successfully  against  current or
future competitors or that competitive pressures faced by us will not materially
adversely  affect our  business,  financial  condition,  prospects or ability to
repay our debts.  Any increase in  competition  could reduce our gross  margins,
require  increased  spending by us on  research  and  development  and sales and
marketing,  and otherwise  materially  adversely affect our business,  financial
condition and prospects.

We face competition from many sources, which include:

      o     Other cable-based access providers;

      o     Telephone-based access providers; and

      o     Alternative technologies.

Cable-based access providers

In the  cable-based  segment of the Internet  access  industry,  we compete with
other  cable-based  data services that are seeking to contract with cable system
operators. These competitors include:

      o     Systems integrators such as Convergence.com, Online System Services,
            HSAnet and Frontier Communications' Global Center business; and

      o     Internet  service  providers  such  as  Earthlink   Network,   Inc.,
            MindSpring Enterprises, Inc., and IDT Corporation.

Several cable system operators have begun to provide high-speed  Internet access
services  over  their  existing  networks.  The  largest of these  cable  system
operators are CableVision, Comcast, Cox, MediaOne, TCI and Time Warner. Comcast,
Cox and TCI  market  through  @Home,  while  Time  Warner  plans to  market  the
RoadRunner  service  through Time Warner's own cable systems as well as to other
cable system  operators  nationwide.  In  particular,  @Home has  announced  its
intention to compete directly in the small- to medium-sized cable system market.

<PAGE>

Telephone-based access providers

Some of our most direct  competitors in the access  markets are  telephone-based
access  providers,   including  incumbent  local  exchange  carriers,   national
interexchange or long distance carriers,  fiber-based competitive local exchange
carriers,  ISPs, online service  providers,  wireless and satellite data service
providers,  and  local  exchange  carriers  that  use  digital  subscriber  line
technologies.  Some of these  competitors are among the largest companies in the
country,  including  AT&T,  MCIWorldCom,  Sprint  and Qwest.  Other  competitors
include BBN, Earthlink,  Netcom, Concentric Network, and PSINet. The result is a
highly competitive and fragmented market.

Some  of  our  potential   competitors  are  offering  diversified  packages  of
telecommunications  services to residential  customers.  If these companies also
offer Internet access service,  then we would be at a competitive  disadvantage.
Many of these companies are offering (or may soon offer)  technologies that will
attempt to compete with some or all of our Internet data service offerings.  The
bases of competition in these markets include:

              o      transmission speed;

              o      security of transmission;

              o      reliability of service;

              o      ease of access;

              o      ratio of price to performance;

              o      ease of use;

              o      content quality;

              o      quality of presentation;

              o      timeliness of content;

              o      customer support;

              o      brand recognition; and
              o      operating experience and revenue sharing.
Alternative technologies

In  addition,   the  market  for  high-speed  data   transmission   services  is
characterized  by several  competing  technologies  that offer  alternatives  to
cable-modem service and conventional  dial-up access.  Competitive  technologies
include  telecom-related  wireline  technologies,  such as  integrated  services
digital network ("ISDN") and digital subscriber line ("DSL")  technologies,  and
wireless   technologies   such  as  local   multipoint   distribution   service,
multichannel  multipoint  distribution  service and various  types of  satellite
services.  Our  prospects may be impaired by Federal  Communications  Commission
("FCC") rules and regulations, which are designed, at least in part, to increase
competition  in video and related  services.  The FCC has also created a General
Wireless  Communications  Service in which licensees are afforded broad latitude
in defining  the nature and service  area of the  communications  services  they
offer. The full impact of the General Wireless Communications Service remains to
be seen. Nevertheless,  all of these new technologies pose potential competition
to our business.  Significant  market  acceptance of  alternative  solutions for
high-speed data transmission could decrease the demand for our services.

We cannot predict  whether and to what extent  technological  developments  will
have  a  material  adverse  effect  on  our  competitive  position.   The  rapid
development of new competing  technologies and standards increases the risk that
current or new competitors could develop products and services that would reduce
the  competitiveness  of our products and services.  If that were to happen,  it
could have a material  adverse effect on our business,  financial  condition and
prospects.

<PAGE>

A  perceived  or actual  failure by us to achieve  or  maintain  high speed data
transmission  could  significantly  reduce  consumer demand for our services and
have  a  material  adverse  effect  on our  business,  financial  condition  and
prospects

Because the ISP Channel  service has been  operational  for a  relatively  short
period of time, our ability to connect and manage a substantial number of online
subscribers at high transmission speeds is unknown.  In addition,  we face risks
related  to  our  ability  to  scale  up to  expected  subscriber  levels  while
maintaining superior performance. While peak downstream data transmission speeds
across  the  cable  network  approaches  30  megabits  per  second in each 6 MHz
channel,   the  actual  downstream  data  transmission  speeds  for  each  cable
subscriber will be significantly slower and will depend on a variety of factors,
including:

      o     actual speed provisioned for the subscriber's cable modem;

      o     quality of the server used to deliver content;

      o     overall Internet traffic congestion;

      o     the  number of active  subscribers  on a given 6 MHz  channel at the
            same time;

      o     the capability of cable modems used; and

      o     the service quality of the cable affiliates' cable networks.

As the  number  of  subscribers  increases,  it may be  necessary  for our cable
affiliates to add  additional 6 MHz channels in order to maintain  adequate data
transmission  speeds  from the  Internet.  These  additions  would  render  such
channels unavailable to such cable affiliates for video or other programming. We
cannot assure you that our cable affiliates will provide additional capacity for
this purpose.  On two-way cable systems,  the  transmission  data channel to the
Internet  is  located in a range not used for  broadcast  by  traditional  cable
networks and is more  susceptible to  interference  than the  transmission  data
channel from the Internet,  resulting in a slower peak transmission speed to the
Internet. In addition to the factors affecting data transmission speeds from the
Internet,  the interference  level in the cable affiliates' data broadcast range
to the Internet can  materially  affect actual data  transmission  speeds to the
Internet.  The actual  data  delivery  speeds  realized by  subscribers  will be
significantly  lower than peak data transmission  speeds and will vary depending
on the subscriber's hardware,  operating system and software configurations.  We
cannot  assure you that we will be able  achieve or maintain  data  transmission
speeds high enough to attract  and retain our  planned  numbers of  subscribers,
especially as the number of subscribers to our services grows.  Consequently,  a
perceived  or actual  failure  by us to  achieve  or  maintain  high  speed data
transmission  could  significantly  reduce  consumer demand for our services and
have  a  material  adverse  effect  on our  business,  financial  condition  and
prospects.

Any damage or failure that causes  interruptions  in our operations could have a
material adverse effect on our business, financial condition and prospects

Our  operations  are  dependent  upon our  ability to  support a highly  complex
network  and avoid  damages  from  fires,  earthquakes,  floods,  power  losses,
telecommunications failures, network software flaws, transmission cable cuts and
similar  events.  The  occurrence  of  any  one  of  these  events  could  cause
interruptions  in the  services  we  provide.  In  addition,  the  failure of an
incumbent  local  exchange  carrier or other  service  provider  to provide  the
communications  capacity  we  require,  as  a  result  of  a  natural  disaster,
operational  disruption or any other reason,  could cause  interruptions  in the
services we provide.  Any damage or failure  that  causes  interruptions  in our
operations  could  have a material  adverse  effect on our  business,  financial
condition and prospects.

We  may be  vulnerable  to  unauthorized  access,  computer  viruses  and  other
disruptive problems which may result in our liability to our subscribers and may
deter others from becoming subscribers

While we have taken substantial security measures,  our networks or those of our
cable affiliates may be vulnerable to unauthorized access,  computer viruses and
other  disruptive  problems.  Internet  service  providers  and  online  service
providers  have  experienced  in the past,  and may  experience  in the  future,
interruptions in service as a result of the accidental or intentional actions of
Internet users.  Unauthorized  access by current and former  employees or others

<PAGE>

could also  potentially  jeopardize  the  security of  confidential  information
stored in our  computer  systems and those of our  subscribers.  Such events may
result in our  liability to our  subscribers  and may deter others from becoming
subscribers,  which  could  have a  material  adverse  effect  on our  business,
financial  condition  and  prospects.  Although  we  intend  to  continue  using
industry-standard security measures, such measures have been circumvented in the
past, and we cannot assure you that these measures will not be  circumvented  in
the future.  Moreover,  we have no control over the security  measures  that our
cable  affiliates  adopt.  Eliminating  computer  viruses and alleviating  other
security  problems  may cause our  subscribers  delays due to  interruptions  or
cessation of service.  Such delays could have a material  adverse  effect on our
business, financial condition and prospects.

If the market for high-quality content fails to develop, or develops more slowly
than  expected,  our  business,   financial  condition  and  prospects  will  be
materially adversely affected

A key  part of our  strategy  is to  provide  Internet  users a more  compelling
interactive  experience than the one currently available to customers of dial-up
Internet  service  providers and online service  providers.  We believe that, in
addition  to  providing  high-speed,  high-performance  Internet  access,  to be
successful we must also develop and aggregate  high-quality  multimedia content.
Our success in providing and aggregating such content will depend in part on:

      o     our  ability  to develop a  customer  base  large  enough to justify
            investments in the development of such content;

      o     the ability of content providers to create and support  high-quality
            multimedia content; and

      o     our ability to aggregate content  offerings in a manner  subscribers
            find attractive.

We cannot assure you that we will be successful in these endeavors.

In addition,  the market for high-quality  multimedia  Internet content has only
recently  begun to develop  and is rapidly  evolving,  and there is  significant
competition  among Internet service  providers and online service  providers for
obtaining such content.  If the market fails to develop, or develops more slowly
than expected, or if competition  increases,  or if our content offerings do not
achieve or sustain  market  acceptance,  our business,  financial  condition and
prospects will be materially adversely affected.

Our failure to attract advertising  revenues in quantities and at rates that are
satisfactory  to us  could  have a  material  adverse  effect  on our  business,
financial condition and prospects

The  success of the ISP Channel  service  depends in part on our ability to draw
advertisers to the ISP Channel.  We expect to derive  significant  revenues from
advertisements  placed on  co-branded  and ISP  Channel  web  pages  and  "click
through"  revenues from products and services  purchased  through links from the
ISP  Channel to  vendors.  We believe  that we can  leverage  the ISP Channel to
provide  demographic  information  to  advertisers  to help them  better  target
prospective  customers.  Nonetheless,  we have  not  generated  any  significant
advertising revenue yet and we cannot assure you that advertisers will find such
information  useful  or will  choose  to  advertise  through  the  ISP  Channel.
Therefore,  we cannot  assure  you that we will be able to  attract  advertising
revenues in quantities and at rates that are  satisfactory to us. The failure to
do so could have a material adverse effect on our business,  financial condition
and prospects.

If we are unsuccessful in establishing and maintaining the ISP Channel brand, or
if we incur  excessive  expenses in promoting  and  maintaining  our brand,  our
business,  financial  condition  and  prospects  would be  materially  adversely
affected

We believe that  establishing and maintaining the ISP Channel brand are critical
to attract and expand our  subscriber  base.  Promotion of the ISP Channel brand
will depend on several factors, including:
<PAGE>


      o     our  success in  providing  high-speed,  high-quality  consumer  and
            business Internet products, services and content;

      o     the marketing efforts of our cable affiliates; and

      o     the reliability of our cable affiliates' networks and services.

We cannot assure you that any of these factors will be achieved.  We have little
control over our cable affiliates' marketing efforts or the reliability of their
networks and services.

If consumers and  businesses do not perceive our existing  products and services
as high  quality or we  introduce  new  products  or  services or enter into new
business  ventures that are not favorably  received by consumers and businesses,
then we will be unsuccessful in building brand  recognition and brand loyalty in
the  marketplace.  In  addition,  to the extent that the ISP Channel  service is
unavailable,  we risk frustrating potential subscribers who are unable to access
our products and services.

Furthermore,  we may need to devote substantial resources to create and maintain
a distinct brand loyalty among customers, to attract and retain subscribers, and
to promote and maintain the ISP Channel brand in a very competitive  market.  If
we are  unsuccessful  in establishing or maintaining the ISP Channel brand or if
we incur  excessive  expenses  in  promoting  and  maintaining  our  brand,  our
business,  financial  condition  and  prospects  would be  materially  adversely
affected.

If we encounter  significant  problems with our billing and collections process,
our business,  financial  condition and prospects could be materially  adversely
affected

We have recently begun the process of designing and implementing our billing and
collections  system  for the ISP  Channel  service.  We  intend  to bill for our
services over the Internet and, in most cases, to collect these invoices through
payments  initiated via the  Internet.  Such invoices and payments have security
risks.  Given the  complexities  of such a system,  we cannot assure you that we
will be successful in developing  and launching the system in a timely manner or
that we will be able to scale the system  quickly and  efficiently if the number
of subscribers requiring such a billing format increases.  Currently,  our cable
affiliates are  responsible  for billing and collection for our Internet  access
services.  As a result,  we have  little or no  control  over the  accuracy  and
timeliness of the invoices or over collection efforts.

Given our  relatively  limited  history with billing and collection for Internet
services,  we cannot  predict the extent to which we may experience bad debts or
our ability to minimize  such bad debts.  If we encounter  significant  problems
with our billing and collections process, our business,  financial condition and
prospects could be materially adversely affected.

We may face potential  liability for defamatory or indecent  content,  which may
cause us to modify the way we provide services

Any  imposition  of  liability  on our  company for  information  carried on the
Internet  could  have a  material  adverse  effect  on our  business,  financial
condition  and  prospects.  The law relating to  liability  of Internet  service
providers  and  online  service   providers  for   information   carried  on  or
disseminated through their networks is currently unsettled. A number of lawsuits
have  sought to  impose  such  liability  for  defamatory  speech  and  indecent
materials.   Congress  has   attempted  to  impose  such   liability,   in  some
circumstances, for transmission of obscene or indecent materials. In one case, a
court  has held that an  online  service  providers  could be found  liable  for
defamatory  matter provided through its service,  on the ground that the service
provider  exercised  active  editorial  control  over  postings to its  service.
Because of the  potential  liability for  materials  carried on or  disseminated
through our systems, we may have to implement measures to reduce our exposure to
such  liability.  Such  measures  may require  the  expenditure  of  substantial
resources or the discontinuation of certain products or services.

We may face potential  liability for  information  retrieved and replicated that
may not be covered by our insurance

Our liability  insurance may not cover  potential  claims  relating to providing
Internet  services or may not be adequate to indemnify us for all liability that
may be imposed. Any liability not covered by insurance or in excess of insurance
coverage  could  have a  material  adverse  effect  on our  business,  financial

<PAGE>

condition and prospects. Because subscribers download and redistribute materials
that are cached or replicated by us in  connection  with our Internet  services,
claims  could be made  against us or our cable  affiliates  under both U.S.  and
foreign law for defamation,  negligence, copyright or trademark infringement, or
other  theories  based on the nature and content of such  materials.  You should
know that these types of claims have been  successfully  brought  against online
service providers. In particular, copyright and trademark laws are evolving both
domestically  and  internationally,  and it is uncertain  how broadly the rights
provided  under  these  laws  will be  applied  to  online  environments.  It is
impossible  for us to determine  who the  potential  rights  holders may be with
respect to all materials available through our services.  In addition,  a number
of third-party owners of patents have claimed to hold patents that cover various
forms of online transactions or online technology.  As with other online service
providers, patent claims could be asserted against us based upon our services or
technologies.

Our success  depends  upon the  development  of new products and services in the
face of rapidly evolving technology

Our products and services may not be commercially successful

Our  future  development  efforts  may not  result  in  commercially  successful
products and  services or our products and services may be rendered  obsolete by
changing  technology,  new industry  standards or new product  announcements  by
competitors.

For example,  we expect digital  set-top boxes capable of supporting  high-speed
Internet access services to be commercially available in the next 18 months. Set
top boxes will enable  subscribers  to access the  Internet  without a computer.
Although the widespread  availability of set-top boxes could increase the demand
for our Internet service, the demand for set-top boxes may never reach the level
we and industry  experts  have  estimated.  Even if set-top  boxes do reach this
level of popularity,  we cannot assure you that we will be able to capitalize on
such  demand.  If this  scenario  occurs or if other  technologies  or standards
applicable  to our  products  or  services  become  obsolete  or  fail  to  gain
widespread  commercial  acceptance,  then our business,  financial condition and
prospects will be materially adversely affected.

Our ability to adapt to changes in  technology  and industry  standards,  and to
develop and  introduce  new and enhanced  products and service  offerings,  will
determine  whether we can maintain or improve our  competitive  position and our
prospects for growth.  However,  the following factors may hinder our efforts to
introduce and sell new products and services:

      o     rapid technological  changes in the Internet and  telecommunications
            industries;

      o     the lengthy product  approval and purchase process of our customers;
            and

      o     our reliance on third-party  technology  for the  development of new
            products and services.

Our suppliers' products may become obsolete, requiring us to purchase additional
inventory

The  technology  underlying  our capital  equipment,  such as headends and cable
modems,  continues  to evolve  and,  accordingly,  our  equipment  could  become
out-of-date or obsolete prior to the time we originally  intended to replace it.
If this  occurs,  we may need to  purchase  substantial  amounts of new  capital
equipment, which could have a material adverse effect on our business, financial
condition and prospects.

Our competitors' products may make our products less commercially viable

The  introduction  by our  competitors  of products or  services  embodying,  or
purporting to embody, new technology could also render our existing products and
services,  as well as products  or  services  under  development,  obsolete  and
unmarketable.  Internet,  telecommunications and cable technologies are evolving
rapidly. Many large corporations,  including large telecommunications providers,
regional Bell operating companies and telecommunications equipment providers, as
well as  large  cable  system  operators,  regularly  announce  new and  planned
technologies  and  service  offerings  that  could  impact  the  market  for our
services.  The announcements can delay purchasing decisions by our customers and
confuse the marketplace  regarding  available  alternatives.  Such announcements
could, in the future,  adversely  impact our business,  financial  condition and
prospects.

<PAGE>


In addition,  we cannot assure you that we will have the financial and technical
resources  necessary  to  continue  successful  development  of new  products or
services based on emerging  technologies.  Moreover, due to intense competition,
there may be a time-limited market opportunity for our cable- based consumer and
business Internet services.  Our services may not achieve widespread  acceptance
before  competitors  offer  products  and  services  with speed and  performance
similar to our current offerings.  In addition,  the widespread  adoption of new
Internet or telecommuting  technologies or standards,  cable-based or otherwise,
could require  substantial and costly  modifications to our equipment,  products
and  services  and  could  fundamentally  alter  the  character,  viability  and
frequency of Internet-based  advertising,  either of which could have a material
adverse effect on our business, financial condition and prospects.

Our purchase of Intelligent  Communications,  Inc. subjects us to risks in a new
market in which we have no experience

On February 9, 1999,  we completed our purchase of  Intelligent  Communications,
Inc., a provider of two-way  satellite  Internet access options using very small
aperture terminal ("VSAT")  technology.  As with mergers generally,  this merger
presents important  challenges and risks.  Achieving the anticipated benefits of
the merger  will  depend,  in part,  upon  whether  the  integration  of the two
companies'  businesses  is achieved in an efficient,  cost-effective  and timely
manner, but we cannot assure that this will occur. The successful combination of
the two businesses will require,  among other things,  the timely integration of
the  companies'  product  and  service  offerings  and the  coordination  of the
companies' research and development efforts.  Because we only recently completed
the  acquisition  of  Intelligent  Communications,  we  cannot  assure  you that
integration will be accomplished smoothly, on time or successfully. Although the
management teams of both SoftNet and Intelligent Communications believe that the
merger will benefit both companies, we cannot assure you that the merger will be
successful.

The  purchase of  Intelligent  Communications  involves  other  risks  including
potential   negative   effects  on  our  reported  results  of  operations  from
acquisition-related  charges and  amortization of acquired  technology and other
intangible assets. As a result of the Intelligent Communications acquisition, we
anticipate  recording a significant  amount of  intangible  assets in the second
quarter  of  fiscal  1999  which  will   adversely   affect  our   earnings  and
profitability  for the  foreseeable  future.  If the  amount  of  such  recorded
intangible  assets is  increased  or we have  future  losses  and are  unable to
demonstrate  our ability to recover  the amount of  intangible  assets  recorded
during such time periods,  the period of amortization could be shortened,  which
may further increase annual  amortization  charges.  In such event, our business
and financial condition could be materially and adversely affected. In addition,
the Intelligent Communications acquisition was structured as a purchase by us of
all of the  outstanding  stock of Intelligent  Communications.  As a result,  we
could be adversely affected by direct and contingent  liabilities of Intelligent
Communications.  It is possible that we are not aware of all of the  liabilities
of Intelligent  Communications  and that Intelligent  Communications has greater
liabilities than we expected. In addition, we have very little experience in the
markets and technology in which Intelligent  Communications is focused. As such,
we are faced with risks that are new to us, including the following:

Dependence on VSAT market

One of the reasons we  purchased  Intelligent  Communications  was to be able to
provide  two-way  satellite  Internet access options to our customers using VSAT
satellite technology.  However, the market for VSAT communications  networks and
services  may not  continue  to grow or VSAT  technology  may be  replaced by an
alternative technology.  A significant decline in this market or the replacement
of the existing VSAT  technology by an alternative  technology  could  adversely
affect our business, financial condition and prospects.

Risk of damage, loss or malfunction of satellite

The loss,  damage or destruction  of any of the  satellites  used by Intelligent
Communications,  or a  temporary  or  permanent  malfunction  of  any  of  these
satellites,  would likely result in interruption of Internet services we provide
over the  satellites  which  could  adversely  affect  our  business,  financial
condition and prospects.

In addition,  use of the  satellites  to provide  Internet  services  requires a
direct line of sight  between the satellite and the cable headend and is subject
to distance and rain  attenuation.  In certain  markets which  experience  heavy
rainfall,  transmission  links must be  engineered  for  shorter  distances  and
greater power to maintain  transmission  quality.  Such engineering  changes may
increase the cost of providing service.  In addition,  such engineering  changes
may require FCC approval, and we cannot assure you that the FCC would grant such
approval.

<PAGE>

Equipment failure and interruption of service

Our  operations   will  require  that  our  network,   including  the  satellite
connections,  operate on a  continuous  basis.  It is not unusual for  networks,
including switching facilities and satellite connections, to experience periodic
service  interruption and equipment failures.  It is therefore possible that the
network  facilities  we use may from time to time  experience  interruptions  or
equipment failures, which would negatively affect consumer confidence as well as
our business operations and reputation.

Dependence on leases for satellites

Intelligent   Communications  currently  leases  satellite  space  from  General
Electric. If for any reason, the leases were to be terminated,  we cannot assure
you that we could  renegotiate  new  leases  with  General  Electric  or another
satellite  provider  on  favorable  terms,  if at all.  We have  not  identified
alternative  providers  and believe that any new leases  would  probably be more
costly to us. In any case, we cannot assure you that an alternative  provider of
satellite services would be available,  or, if available,  would be available on
terms favorable to us.

Competition

The market for Internet  access services is extremely  competitive.  Intelligent
Communications  believes that its ability to compete successfully depends upon a
number of factors,  including: market presence; the capacity,  reliability,  and
security of its network infrastructure;  the pricing policies of its competitors
and  suppliers;  and the timing and  release of new  products  and  services  by
Intelligent   Communications   and  its  competitors.   We  cannot  assure  that
Intelligent  Communications will be able to successfully compete with respect to
these factors.

Government regulation

The VSAT  satellite  industry  is a highly  regulated  industry.  In the  United
States,  operation and use of VSAT satellites requires licenses from the FCC. As
a lessee of satellite space, we could in the future be indirectly subject to new
laws, policies or regulations or changes in the interpretation or application of
existing  laws,  policies or  regulations,  that  modify the present  regulatory
environment in the United States.

While we believe that our lessors  will be able to obtain all U.S.  licenses and
authorizations  necessary to operate  effectively,  we cannot assure you that we
our lessors will be  successful  in doing so. Our failure to  indirectly  obtain
some or all necessary licenses or approvals could have a material adverse effect
on our business, financial condition and prospects.

If we  are  unable  to  successfully  integrate  future  acquisitions  into  our
operations, then our results and financial condition may be adversely affected

In addition to the recent  acquisition of Intelligent  Communications,  Inc., we
may acquire  other  businesses  that we believe  will  complement  our  existing
business.  We cannot predict if or when any prospective  acquisitions will occur
or the likelihood that they will be completed on favorable terms.

Acquiring a business involves many risks, including:

      o     potential  disruption  of our  ongoing  business  and  diversion  of
            resources and management time;

      o     incurrence of unforeseen obligations or liabilities;

      o     possible  inability of  management  to maintain  uniform  standards,
            controls, procedures and policies;

      o     difficulty assimilating the acquired operations and personnel;

      o     risks of entering markets in which we have little or no direct prior
            experience; and

      o     potential impairment of relationships with employees or customers as
            a result of changes in management.

<PAGE>

We cannot assure that we will make any  acquisitions  or that we will be able to
obtain  additional  financing  for  such  acquisitions,  if  necessary.  If  any
acquisitions  are made,  we cannot  assure that we will be able to  successfully
integrate  the  acquired  business  into our  operations  or that  the  acquired
business will perform as expected.

Loss of key personnel may disrupt our operations

The loss of key personnel may disrupt our operations.  Our success  depends,  in
large part, on our ability to attract and retain qualified technical, marketing,
sales and management  personnel.  With the expansion of the ISP Channel service,
we are currently seeking new employees.  However, competition for such personnel
is intense  in our  business,  and thus,  we may be  unsuccessful  in our hiring
efforts.  To launch the ISP Channel service  concept on a large-scale  basis, we
have recently  assembled a new management  team,  most of whom have been with us
for less than six months.  The loss of any member of the new team, or failure to
attract or retain other key employees,  could have a material  adverse effect on
our business, financial condition and prospects.

Direct and indirect government regulation can significantly impact our business

Currently,  neither  the FCC nor  any  other  federal  or  state  communications
regulatory  agency directly  regulates  Internet access services provided by our
cable systems.  However,  any changes in law or regulation  relating to Internet
connectivity,  cable  operators or  telecommunications  markets could affect the
nature,  scope and  prices of our  services.  Such  changes  include  those that
directly  or  indirectly  affect  costs,  limit  usage  of  subscriber-  related
information   or  increase  the   likelihood  or  scope  of   competition   from
telecommunications companies or other Internet access providers.

Possibility of changes in law or regulation

Because the  provision of Internet  access  services  using cable  networks is a
relatively recent  development,  the regulatory  classification of such services
remains  unsettled.  Some parties  have argued that  providing  Internet  access
services  over a cable  network  is a  "telecommunications  service"  and  that,
therefore,  Internet  access service  providers  should be subject to regulation
which, under the Communications Act of 1934, apply to telephone companies. Other
parties have argued that  Internet  access  services  over the cable system is a
cable service under the Communications Act, which would subject such services to
a  different  set of laws and  regulations.  It is unclear at this time  whether
federal,  state, or local governing  bodies will adopt one  classification  over
another,  or adopt another regulatory  classification  altogether,  for Internet
access services provided over cable systems. The FCC recently decided to address
Internet  access  issuers in its  February 17, 1999 order  approving  the merger
between AT&T and TCI, which was announced by the two companies on June 24, 1998.
A number of parties had opposed the merger  unless the FCC required the AT&T/TCI
combination  to provide  unaffiliated  ISPs with  unbundled,  open access to the
cable platform whenever that platform is being used by an AT&T/TCI  affiliate to
provide  Internet  service.  Other  parties  argued that the FCC should  examine
industry-wide issues surrounding open access to cable-provided  Internet service
in a generic rulemaking, rather than in the specific,  adjudicatory context of a
merger  evaluation.  The FCC decided  that it would be imprudent to grant either
request for action at this time given the nascent stage in the  development  and
deployment of high-speed  Internet access services.  Certain local jurisdictions
that  approved the AT&T/TCI  merger have imposed open access  conditions on such
approval,  while other such local jurisdictions have rejected such conditions or
have  reserved  the right to impose such  conditions  in the  future.  We cannot
predict the outcome or scope of the local approval  process.  Nor can we predict
the impact,  if any,  that future  federal,  state or local legal or  regulatory
changes, including open access conditions, might have on our business.

Regulations  affecting the cable  industry may discourage  cable  operators from
upgrading their systems

Regulation  of  cable  television  may  affect  the  speed at  which  our  cable
affiliates upgrade their cable infrastructures to two-way cable. Currently,  our
cable  affiliates  have generally  elected to classify the  distribution  of our
services  as  "additional  cable  services"  under  their  respective  franchise
agreements,  and accordingly pay franchise fees. However,  the election by cable
operators to classify  Internet  access as an  additional  cable  service may be
challenged  before  the FCC,  the  courts  or  Congress,  and any  change in the
classification  of  service  could  have a  potentially  adverse  impact  on our
company.

Our cable affiliates may be subject to multiple  franchise fees for distributing
our services

Another possible risk is that local franchise  authorities may subject the cable
affiliates to higher or additional  franchise fees or taxes or otherwise require
them to obtain  additional  franchises in connection  with  distribution  of our

<PAGE>

services.  There are  thousands of franchise  authorities  in the United  States
alone,  and  thus  it  will  be  difficult  or  impossible  for us or our  cable
affiliates to operate under a unified set of franchise requirements.

Possible  negative  consequences  if cable  operators  are  classified as common
carriers

If the FCC or another  governmental  agency classifies cable system operators as
"common carriers" or "telecommunications carriers" because they provide Internet
services,  or if cable system operators themselves seek such classification as a
means of limiting their liability, we could lose our rights as the exclusive ISP
for some of our cable affiliates and we or our cable affiliates could be subject
to common carrier regulation by federal and state regulators.

Import restrictions may affect the delivery schedules and costs of supplies from
foreign shippers

In addition, we obtain some of the components for our products and services from
foreign  suppliers  which may be subject  to  tariffs,  duties and other  import
restrictions.  Any changes in law or regulation including those discussed above,
whether in the United States or elsewhere, could materially adversely affect our
business, financial condition and prospects.

Failure to sell MTC in a timely  manner  could  adversely  affect our ability to
implement our business plan

We have  announced  the planned  sale of MTC. We intend to apply the proceeds of
such a sale toward the  repayment  of debt and the  expansion of the ISP Channel
service. However, we cannot assure you that these efforts will be successful. In
the  absence  of such a sale,  management's  attention  could  be  substantially
diverted  to operate or  otherwise  dispose of MTC. If a sale of MTC is delayed,
its value could be diminished. Moreover, MTC could incur losses and operate on a
negative  cash flow basis in the future.  Thus,  any delay in finding a buyer or
failure  to sell this  division  could  have a  material  adverse  effect on our
business, financial condition and prospects.

We do not intend to pay dividends

We have not historically  paid any cash dividends on our common stock and do not
expect to declare any such dividends in the foreseeable  future.  Payment of any
future  dividends  will depend upon our earnings and capital  requirements,  our
debt  obligations and other factors the board of directors  deems  relevant.  We
currently intend to retain our earnings,  if any, to finance the development and
expansion of the ISP Channel  service.  Our  certificate  of  incorporation  (1)
prohibits  the  payment of cash  dividends  on our  common  stock,  without  the
approval of the holders of the preferred  stock and (2) upon  liquidation of our
company,  requires  us to pay the  holders of the  convertible  preferred  stock
before we make any payments to the holders of our common stock.  You should also
know that some of our financing agreements restrict our ability to pay dividends
on our common stock.

Our stock price is volatile

The  volatility  of our stock  price may make it  difficult  for  holders of the
common stock to transfer  their shares at the prices they want. The market price
for our common stock has been  volatile in the past,  and several  factors could
cause the price to fluctuate substantially in the future. These factors include:

      o     announcements of developments related to our business;

      o     fluctuations in our results of operations;

      o     sales of substantial amounts of our securities into the marketplace;

      o     general conditions in our industries or the worldwide economy;

      o     an outbreak of war or hostilities;

      o     a shortfall in revenues or earnings compared to securities analysts'
            expectations;

      o     changes in analysts' recommendations or projections;

      o     announcements  of new products or services by us or our competitors;
            and

      o     changes in our relationships with our suppliers or customers.

The market price of our common stock may fluctuate  significantly in the future,
and these fluctuations may be unrelated to our performance. General market price
declines or market  volatility in the future could adversely affect the price of
our common stock,  and thus,  the current  market price may not be indicative of
future market prices.

Prospective anti-takeover provisions could negatively impact our stockholders

We are a Delaware  corporation.  The Delaware  General  Corporation Law contains
certain provisions that may discourage, delay or make a change in control of our
company  more  difficult  or prevent  the  removal of  incumbent  directors.  In
addition,  our certificate of incorporation  and bylaws have certain  provisions
that have the same effect.  These  provisions may have a negative  impact on the
price of our common stock and may discourage  third-party  bidders from making a
bid for our company or may reduce any premiums  paid to  stockholders  for their
common stock.

The Year 2000 issue could harm our operations

Many  computer  programs  have been written using two digits rather than four to
define the  applicable  year.  This  poses a problem  at the end of the  century
because such computer  programs would not properly  recognize a year that begins
with "20" instead of "19." This, in turn,  could result in major system failures
or  miscalculations  that could disrupt our business.  We have  formulated a Y2K
Plan to address our Y2K issues and have  created a Y2K Task Force  headed by the
Director of Information Systems and Data Services to implement the plan. Our Y2K
Plan has six phases:

1)           Organizational   Awareness   -  educate   our   employees,   senior
             management, and the board of directors about the Y2K issue.
2)           Inventory - complete  inventory  of internal  business  systems and
             their  relative  priority to  continuing  business  operations.  In
             addition,  this phase  includes a complete  inventory  of  critical
             vendors,  suppliers and services providers and their Y2K compliance
             status.
3)           Assessment - assessment of internal  business  systems and critical
             vendors,  suppliers and service  providers and their Y2K compliance
             status.
4)           Planning - preparing the individual project plans and project teams
             and other required internal and external resources to implement the
             required solutions for Y2K compliance.
5)           Execution - implementation of the solutions and fixes.
6)           Validation - testing the solutions for Y2K compliance.

Our Y2K Plan will apply to two areas:

1.    Internal business systems

2.    Compliance by external customers and providers

Internal business systems

Our internal  business systems and workstation  business  applications will be a
primary  area  of  focus.  We are in  the  unique  position  of  completing  the
implementation  of new  enterprise-wide  business  solutions to replace existing
manual processes and/or "home grown"  applications  during 1999. These solutions
are  represented by their vendors as being fully Y2K compliant.  We have few, if
any, "legacy" applications that will need to be evaluated for Y2K compliance.

We completed the Inventory,  Assessment and Planning Phases of substantially all
critical internal business systems.  The Execution and Validation Phases will be
completed  by August 31,  1999.  We expect to be Y2K  compliant  on all critical
systems, which rely on the calendar year, before December 31, 1999.

Some  non-critical  systems  may not be  addressed  until  after  January  2000.
However,  we believe such systems will not cause significant  disruptions in our
operations.

<PAGE>

Compliance by external customers and providers

We are in the process of the  inventory  and  assessment  phases of our critical
suppliers,  service  providers and  contractors to determine the extent to which
the our interface  systems are  susceptible to those third  parties'  failure to
remedy  their own Y2K  issues.  We expect  that  assessment  will be complete by
mid-1999.  To the extent that responses to Y2K readiness are unsatisfactory,  we
intend to change suppliers,  service providers or contractors to those that have
demonstrated  Y2K readiness.  We cannot be assured that we will be successful in
finding such alternative suppliers, service providers and contractors. We do not
currently have any formal information concerning the status of our customers but
have  received  indications  that  most  of our  customers  are  working  on Y2K
compliance.

Risks associated with Y2K

We believe  the major risk  associated  with the Y2K issue is the ability of our
key business partners and vendors to resolve their own Y2K issues. We will spend
a great  deal of time  over  the  next  several  months,  working  closely  with
suppliers and vendors, to assure their compliance.

Should a  situation  occur  where a key  partner  or vendor is unable to resolve
their  Y2K  issue,  we  expect to be in a  position  to change to Y2K  compliant
partners and vendors.

Costs to address Y2K issues

Because  we are in the  unique  position  of  implementing  new  enterprise-wide
business  solutions to replace  existing  manual  processes  and/or "home grown"
applications,  there will be little,  if any,  Y2K changes  required to existing
business applications.  All of the new business applications  implemented (or in
the  process  of  being  implemented  in 1999)  are  represented  as  being  Y2K
compliant.

We  currently  believe that  implementing  our Y2K Plan will not have a material
effect on our financial position.

Contingency Plan

We have not  formulated  a  contingency  plan at this  time but  expect  to have
specific contingency plans in place prior to September 30, 1999.

Summary

We anticipate that the Y2K issue will not have a material  adverse effect on the
financial  position  or results of our  operations.  There can be no  assurance,
however, that the systems of other companies or government entities, on which we
rely for supplies, cash payments, and future business, will be timely converted,
or that a failure to convert by another  company or government  entities,  would
not have a  material  adverse  effect on our  financial  position  or results of
operations. If third-party suppliers,  service providers and contractors, due to
Y2K issues, fail to provide us with components, materials, or services which are
necessary  to  deliver  our  service  and  product  offerings,  with  sufficient
electrical power and  transportation  infrastructure  to deliver our service and
product  offerings,  then any such failure could have a material  adverse effect
our ability to conduct business,  as well as our financial  position and results
of operations.




<PAGE>



Item 6.  Exhibits and Reports on Form 8-K.

     (a) Exhibits

      3.1...Certificate of Incorporation  (this document is hereby  incorporated
            by reference to our Registration  Statement on Form S-3/A filed with
            the SEC on April 22, 1999)
      3.2...By-laws (this  document is hereby  incorporated  by reference to our
            Registration Statement on Form S-3/A filed with the SEC on April 22,
            1999)
      4.1...Article Fifth of the Certificate of Incorporation (see exhibit 3.1)
      4.2...Articles II, VI and VII of the By-laws (see exhibit 3.1)
      10.1..Securities  Purchase  Agreement by and among SoftNet Systems,  Inc.,
            Stark International and Shepherd  Investments  International,  Ltd.,
            dated  January 12, 1999 (this  document  is hereby  incorporated  by
            reference to our Current  Report on Form 8-K,  filed with the SEC on
            January 26, 1999)
      10.2..Registration  Rights Agreement by and among SoftNet  Systems,  Inc.,
            Stark International and Shepherd  Investments  International,  Ltd.,
            dated  January 12, 1999 (this  document  is hereby  incorporated  by
            reference to our Current  Report on Form 8-K,  filed with the SEC on
            January 26, 1999)
      27.1..Financial Data Schedule
      99.1..Proposal   Number  Two  Adopted  at  the  1999  Annual   Meeting  of
            Stockholders  (this document is hereby  incorporated by reference to
            our  definitive  proxy  statement on Form 14A, filed with the SEC on
            March 17, 1999)
      99.2..Proposal   Number  Six  Adopted  at  the  1999  Annual   Meeting  of
            Stockholders  (this document is hereby  incorporated by reference to
            our  definitive  proxy  statement on Form 14A, filed with the SEC on
            March 17, 1999)

(b)   Reports on Form 8-K

         On January 26,  1999,  the Company  filed a Current  Report on Form 8-K
         reporting  the  issuance  and  sale  of  its  9%  senior   subordinated
         convertible notes due 2001.

         On February 24, 1999,  the Company  filed a Current  Report on Form 8-K
         reporting  the  acquisition  of  Intellicom,  which was  amended on the
         Company's Current Report on Form 8-K/A filed February 26, 1999, and was
         further  amended on the  Company's  Current  Report on Form 8-K/A filed
         March  12,  1999.  These  Current  Reports  contained  both  historical
         financial  statements of Intellicom,  as well as pro forma consolidated
         financial statements of the Company as if the acquisition of Intellicom
         had  occurred as of December  31, 1998 for the balance  sheet and as of
         October 31, 1997 for the statements of operations.

         On February 26, 1999,  the Company  filed a Current  Report on Form 8-K
         reporting the disposition of KCI.

         On March 5,  1999,  the  Company  filed a  Current  Report  on Form 8-K
         reporting  the  conversion  of all of the shares of Series B redeemable
         convertible preferred stock into common stock.



<PAGE>




                                   SIGNATURES


Pursuant to the  requirements of Section 13 or 15(d) of the Securities  Exchange
Act of 1934,  the  registrant  has duly  caused  this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

SOFTNET SYSTEMS, INC.



/s/ Douglas S. Sinclair
-----------------------
Douglas S. Sinclair
Chief Financial Officer


Dated:  May 17, 1999